Car finance: Do I really need a deposit?

Car finance: Do I really need a deposit?

11 April 2018 Concept Car

Are you, too, worried about having to pay a car deposit? You’re not alone. Every single day, we welcome potential buyers into our Manchester showroom who are afraid their deal may falter because of a mandatory downpayment. The truth, however, is that car deposits are no longer by default a must. But even if you do need to agree to one, they tend to be a lot more manageable – thanks to a variety of new payment models.

So why has the car deposit gained such a bad reputation?

In this article, we’ll give you insight into the topic. We’ll explain exactly what a deposit is and what it isn’t. We’ll explain why a deposit can be a problem and why it may even make sense. And finally, we’ll provide you with some information why we don’t require all of our customers to pay a deposit. As we’ve written in our blog before, bad credit car loan is no longer just a dream.

First, though, let’s answer a seemingly simple question first:

What is a car deposit?

As we already indicated, the question seems simple. But there is definitely reason for confusion here. After all, there are two types of car deposits and their motivation is strikingly different.

Car deposit type 1: Proof of Contract

The first kind of deposit serves as a security – a proof of contract if you will. Suppose you’ve found a nice car that you could well imagine buying. But for one or more reasons, you can’t commit to it straight away. Maybe you want to confer with your partner first. Maybe you need to secure the financing with your bank. Or maybe you’re just not 100% sure yet and want to keep on looking.

In all of these cases, you can lay down a deposit to demonstrate your serious intent to buy the vehicle. The dealer will then ‘reserve’ the car for you for a certain period of time. This means that you can now take care of the issues mentioned above before making a final decision.

Should you decide to buy the car, your deposit will be treated as a downpayment. If you should, however, decide against the deal, the dealer may retain part or all of the deposit.

Car deposit type 2: Upfront Payment

As onlinecarloans.co.nz have succinctly put it, a car deposit is “an upfront, part payment on your new vehicle”. Because this type of deposit affects your loan payments, it is also sometimes referred to as a “car loan deposit” rather than just a “car deposit”.

What this means is that instead of paying for car entirely through the loan instalments, you now pay part of the total sum upfront. The higher the deposit, the lower your monthly rate – and the faster you can pay off the purchase price.

It’s not hard to see why dealers like deposits

Both types of deposits obviously make sense for a dealer. When a deposit serves as a proof of contract or a security, it can offset losses incurred if a customer reserves a car but then does not buy it. After all, the dealer could potentially have sold the vehicle to another customer in the meantime. Deposits naturally need to remain within reasonable limits. But for many dealers, at least a small payment is still important.

Car loan deposits as downpayments are also useful for dealers. This is especially true if the dealer also provides the financing. A deposit is an indication of the buyer’s financial capacities. If a customer only has a spotty credit history, no stable employment or very limited cash reserves, a deposit can work like a guarantee that they will be able to keep up their loan payments.

This kind of deposit used to be a standard part of every car financing deal for many years. Although it still continues to be used, it no longer is an absolute requirement.

So let’s take a closer look for a moment at the reasons …

… why car loan deposits are no longer as important as they used to be

Let’s be honest: most customers do not like car deposits. If you’re strapped for cash, you may just be able to pay off your monthly rates, but not a deposit. This means that a deposit can cause potential deals to fall through that would have been possible without it.

Deposits obviously deplete your financial reserves even if you can afford them. This makes you more vulnerable to external shocks or sudden financial obligations. A car loan without deposit simply seems more manageable and is therefore typically the more popular choice.

This is why dealers have started to think about how to make the deposit a less threatening proposition. They have come up with a variety of new financing options. All of them reduce the height of the deposit or eliminate it altogether.

So what are these new financing options?

The deposit is closely associated with a regular car loan, also sometimes called a personal loan. Personal loans will not always require a deposit, but it’s usually a requirement if you have a bad credit rating. A deposit for a personal loan will range between 10-25% of the asking price.

However, this type of financing is no longer the norm today when it comes to new car purchases. Its popularity has been eclipsed by a new type of car financing deal called a PCP – Personal Contract Purchase. A PCP fuses element of a regular purchase with a leasing agreement. Monthly rates tend to be lower than with a traditional loan. And so, the deposit can come down accordingly. Around 10% is a typical PCP deposit these days.

A Personal Contract Hire (PCH) is similar to a PCP, but the monthly rates are lower. A deposit is still required. But it is a lot lower than with almost any other option. According to Whatcar, 3-6 months of your rate instalments are pretty common.

Can zero be the maximum?

Can zero be the maximum? - Concept Car Credit
Finally, there are the zero deposit deals we’re sure you’ve already heard about. With these loans, the dealer does not ask for a deposit. Instead, he simply calculates a monthly instalment based on the length of the repayment period and the price of the car.

Zero deposit deals can be a viable option and they do not need to be sign of shady business practises. However, they can turn out to be a more expensive deal than a personal loan with deposit or any of the other options mentioned above. Also, many car sellers will only offer this type of financing to customers with spotless credit histories.

This makes zero deals impossible for many potential buyers in the UK.

How to use a deposit as a car buying strategy

The reason why a zero deposit deal needs to be more expensive is not just because it’s less secure for the dealer. There is a very simple financial mechanism at work here, which is also the reason why some buyers are actively looking for deals with a higher deposit rather than a lower one!

Simply put, a higher deposit reduces the basis for calculating your monthly rate payments. The lower this basis, the less you have to pay in interest and thus, the lower your overall costs. The higher your interest, the more a higher deposit makes sense. As the Money Advice Service explain:

“Where APR charges are high – anything over around four percent is on the high side – you’re better off putting down a large deposit, as this will reduce the amount of interest you’ll pay overall. In the case of low interest charges, the size of deposit has little effect on the total amount you’ll have to stump up. Meanwhile, where interest-free credit is available, the amount of deposit has no impact on the overall bill – though the larger the deposit, the lower the monthly payments.”

Onlinecarloans.co.nz provide a great example of how this can work out in practise based on three different variations:

  • Paying a deposit.
  • Paying no deposit.
  • And paying no deposit but paying off the loan faster.

Visit their website to check out these different scenarios and how they affect your wallet.

How to improve your chances of a no deposit deal

Obviously, not everyone will be able to chose such a strategy. To many, coughing up a deposit is simply not possible. If this is the case for you, too, you should start thinking about improving your chances of securing a no deposit deal. Monthly rates will undeniably go up. But at least you should be able to pay off the instalments and get behind the wheel again.

Anything that reduces the risk of you defaulting on your loan will make this more probable. Go Rapid have identified four areas that can persuade a dealer to forgo in the deposit:

  • A clean credit history
  • Proof of income
  • Stable employment
  • Stable residence

This may sound like a pretty Utopian list, but it really isn’t. A stable residence is usually a given and you can significantly improve your credit rating with a few simple steps.

Deposits on a case by case basis

Deposits on a case by case basis - Concept Car Credit
At Concept Car Credit, we love flexibility. It tends to be good for both you and us. As you’ve seen, deposits especially can be both a good or a bad thing, depending on your preferences and your means.

This is why we decide on the deposit question on a case by case basis. For some of our customers, a deposit is outside their league. So in those cases, we will try everything we can to help them get a financing deal without one. For others, a deposit can help them pay off the price faster. So whenever possible, we try to accommodate their wishes.

Don’t hesitate to contact us, therefore, to see if we can work out a car deal suited to your desires. You can start by filling our our application form – we’ll get back to you in no time.

11 April 2018 Concept Car