Blog Do you need a car loan deposit?

Do you need a car loan deposit?

17 November 2020
Do you need a car loan deposit?

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What is a car loan deposit, and can one benefit you? Let’s take a look.

According to figures from ASIC, the average car bought in Australia is almost $28,000, but the average loan amount is just under $18,500. This means that not every car buyer is borrowing the entire value of the car as a part of their home loan. Instead, many of the near 60% of Australians who use a car loan when buying a car are paying a deposit upfront.

What is a car loan deposit?

A deposit on a loan (be it a car loan or something bigger like a home loan) is essentially a down payment on a loan, where you agree to pay a portion of the purchase price upfront in order to prove your trustworthiness as a borrower.

Do you need a car loan deposit?

For a home loan, you often need to provide a deposit (usually 20% or more), but this is not the case with a car loan. Although some lenders will require a deposit, it’s entirely possible to get a car loan without one, letting you borrow the car’s full value over the loan term.

Lenders might ask for a deposit if:

  • You have no credit history, or a bad credit history;

  • You have negative equity (aka you owe money) on your current car loan; or

  • The lenders may have specific policies requiring a deposit from certain customers, or from everyone

Although you don’t actually need to pay a car loan in most cases, it can be in your interest to do so.

Ways a car loan deposit can be beneficial

There are a couple of ways paying some money upfront for a car can save you money over the course of the loan.

  1. A car loan can increase your chances of approval: By paying a deposit, you’re demonstrating to the lender you’re capable of good savings habits, potentially making them more likely to approve your application.

  2. It can make your repayments more manageable: By increasing your deposit, you’re actually borrowing less money, which means there’s less money for you to be charged interest on. Less interest being charged means your minimum repayments will be smaller, potentially freeing up money for other expenses or allowing you to pay off the loan faster by paying above the minimum.

However, there are some cons to saving for a deposit. For example, if you wait too long you could miss out on your dream car, with inflation potentially withering away your savings (or you could just end up spending it).

But overall, having a car loan deposit is a good thing because of more manageable repayments. With the same 4% p.a interest rate, repayments on a 5-year loan for a $30,000 car:

  • Would be $460.4 per month with a $5,000 deposit; but

  • Would be $552.5 per month with no deposit, almost $100 more each month

So you can see, option 2 with no deposit is much more expensive.

How much should your car loan deposit be?

If you do decide to pay a deposit, it’s important to note that the larger the deposit, the less you’ll pay overall, which is particularly important for a car as it’s a depreciating asset. By all means, dip into your savings if you have a deposit saved up, but know you can still get a car loan without one.

The most important thing, whether it’s for getting a good interest rate or getting approved for a loan, is to buy within your means. The deposit is less important than buying a car you can afford as opposed to spending too much on a flashy car outside of your budget. An unaffordable car can hurt you more than no deposit ever could.

Calculate your car loan repayments

If you’re ready to step into the car market, you need to first work out what you can afford to borrow and what your potential repayments might be. With loans.com.au’s car loan repayments calculator, you can see how much a car loan deposit and a balloon payment could affect your potential repayments, and how much you’d need to pay for your car each month.

If you’re confident you’re ready to purchase that next car, then apply now for our low rate car loan, or speak to one of our friendly lending specialists to get started on your application.

Apply now