A car loan deposit can be a good way to reduce your monthly payment and interest paid, but find out if you actually need one.
With prices for even regular cars topping $50,000 nowadays, car loans have become popular, allowing buyers to get into a newer and safer vehicle, or one that fits their lifestyle needs better. Not every buyer borrows the full amount for a new vehicle purchase however, instead using a car deposit.
Find out how a car loan deposit can be beneficial, and how to use one.
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, which can come with a few benefits.
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 could be beneficial.
There are a few ways paying some money upfront for a car can save you money over the course of the loan.
Lower interest paid: Interest paid on say, $20,000, can be significantly less than interest paid on $30,000. Even a few thousand dollars' in a deposit could result in hundreds saved in interest over the life of the loan.
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 car loan application.
It can make your repayments more manageable: By increasing your deposit, you’re actually borrowing less money, which means there’s less ‘principal’ to pay off. 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, the obvious con is that it could take you time to save up for a deposit. This money could be better spent on other household items like groceries, bills and other essentials.
According to loans.com.au Car Loans Team Leader Luke Karadzic, having a car loan deposit can be a financially savvy option, because it makes the repayments lower, and lowers interest paid over the life of the loan.
“In addition to reducing your regular repayments, a deposit is a great way to reduce the total interest cost of your car loan. If you plan on selling your vehicle in the future, before the end of the loan term, a deposit ensures you have more equity in the vehicle.”
“Cars typically depreciate most in their first few years, so this initial equity can help reduce the risk of needing to contribute out of pocket funds when selling. Ideally, you want your car to be worth more than your loan, and a deposit helps achieve this.”
With a 4% p.a interest rate, for example, repayments on a 5-year loan for a $30,000 car:
Would be $460.40 per month with a $5,000 deposit; but
Would be $552.50 per month with no deposit, almost $100 more each month
So you can see, option one is cheaper and is one way to reduce your car loan repayments. However, you’ll have to weigh up if that $5,000 could be better spent on other things, especially with interest rates relatively low. This is called ‘opportunity cost’.
While 20% is usually required for a house, a 10% deposit for a car is normal, and can reduce your interest paid and repayments noticeably. 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. However, upgrading your car can be useful if it means a safer ride for you and your kids, or a more reliable transport option to attain better employment.
A lender will assess your income, other debts and expenses to determine how a car loan payment will fit into your budget, to make sure you’re not over-extending yourself. This is where a deposit can be handy, as it demonstrates you can both save, and be conservative with your money.
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 our 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.
Yes, it is possible to have two cars under finance. However, a lender will assess your ability to pay for both of them. Two $50,000 cars, for example, could be a significant hit to the budget.
The short answer is yes - you can get a new car loan without a deposit. However, a deposit can be a useful tool in reducing your interest paid, and loan repayments. However, also consider if that money saved could be better put towards other things.
If you’re ready to shop for a new ride, speak with one of our lending specialists today to discuss car loan pre-approval.Get pre-approved