Car loan deposit: Pros & Cons
If you’re new to the world of car finance, we’ve compiled a quick list of what you need to keep an eye out for when searching for the best car loan.
A car deposit, also known as a downpayment, is a portion of the car finance you pay upfront. The amount you spend on your downpayment will be deducted from your car loan’s principal amount.
Because a downpayment isn’t mandatory for car loans, a lot of borrowers wonder if they should even put down a deposit. Both choices offer benefits and drawbacks. The key is finding the option that is best for your situation.
When should you put down a car loan deposit?
A car loan deposit is a good idea when you can comfortably afford it. The rule of thumb is that the bigger the deposit, the less you must pay back on a car loan and the more you can save. In some cases, not giving a down payment makes more sense. For example, if you don’t have time to save up for a sizable deposit, foregoing it altogether could be more beneficial to get you in a new car sooner.
Lenders don’t usually ask for a deposit for car loan applications. This means you can borrow the full price of the vehicle without paying for lender’s insurance unlike when you apply for a mortgage. Although there are plenty of advantages to putting down a deposit, the benefits may not be worth it depending on your situation.
What’s a normal downpayment for a car loan?
Car loan deposits usually range from 10% to 20% of the car’s purchase price. A good car loan deposit typically sits at 10% and anything in excess of that could significantly lower your car loan costs. Use a car loan calculator to see how the deposit amount affects the total cost of the loan.
Reasons to provide a car loan deposit
Paying a car loan deposit offers plenty of great benefits, from saving money to making repayments more manageable. Here are some advantages of paying a deposit on your car loan:
Lower repayments and save on interest
You’re borrowing less money from the lender when you put down a deposit. By decreasing the principal amount owed, you could significantly lower the repayment amount making it easier to manage. You’ll also be reducing the interest you need to pay over the life of the loan. This could give you considerable savings in the long run.
This all depends on how much you put towards the car loan deposit. If you put down a big deposit, you owe less and will have lower repayments, and vice versa.
Own your car sooner and get more equity
By minimising the principal loan owed, you could opt for a shorter car loan term, as the repayments will be more manageable, so you can own your car much sooner. Cars depreciate quickly; paying off your car loan sooner rather than later can help you maximise its value. This can also help you avoid negative equity on your car finance which is when the outstanding balance on your loan is bigger than the car’s value.
Improve chances of approval
Borrowers who offer sizable car loan deposits are typically viewed more favourably by lenders. When you provide a significant down payment, lenders see it as a sign that you have sufficient savings and are in good financial standing. This not only improves your chances of getting a car loan, but because lenders view you as less of a risk, they could offer better terms and interest rates.
Drawbacks to providing a car loan deposit
There are some disadvantages to providing a car loan deposit. However, these drawbacks are usually due to the financial and time constraints it puts on the borrower. Here are some of the downsides of putting down a car loan deposit:
Saving takes time
If you need a car immediately, you may not have enough time to save for a deposit. Although there are plenty of benefits when you put down a car deposit, it may not be the right choice when you’re in urgent need of a new vehicle.
It’s also not advisable to spend your emergency funds on a car deposit as it leaves you in a vulnerable position. Since car loans don’t require a deposit, opting to borrow the full price of the vehicle may be a better option for certain situations.
Ties up your funds
You’ll have less cash on hand when you pay for a car loan deposit. Even if you pay a 10% deposit, that’s still a substantial amount that could be put towards your savings, bills, debt payments, and investments instead.
Finding the ideal car loan
At loans.com.au, we have a range of car loan options for you to choose from. From no deposit car loans to car loan refinance, we have a finance solution that fits your situation. Get to know more about our low rate car loans by calling 13 10 90 or apply online today!
Find out in under 2 minutes if you qualify for one of our low rate car loans.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
