A no-deposit car loan is attainable for most people as long as you have a decent job and credit history.
If you have some savings and want a smaller car loan, you have the option to pay a deposit when purchasing your new car.
In some circumstances, a lender may require you to pay a deposit. In this article, we will discuss when a deposit may be needed and how this affects your car loan application.
In This Post:
What Is a Car Loan Deposit?
A car loan deposit is an upfront payment made toward the cost of your new car before financing the rest with a loan.
This reduces the amount you are required to borrow to fund the purchase of the vehicle. Resulting in lower risk for the lender and less debt exposure for you on an asset that is going to depreciate.
Lowering the risk for a lender can work in your favour and help you get a better deal in some cases.
Can You Get a Car Loan With No Deposit?
Yes, you can usually get a car loan without a deposit as long as your credit history is in reasonable shape.
A deposit is usually not required and the majority of loans we help secure here at Gusto Finance do not require a deposit.
However, there are trade-offs in doing this and it is important that you understand the additional risks that come with a higher loan.
Risks of a No Deposit Car Loan
When you skip the deposit, you’re essentially borrowing the full price of the vehicle plus fees, and any extras that you decide to finance such as your comprehensive insurance policy.
That means larger repayments and more interest payable over time.
If you can afford the repayments then this is not a problem. However, if your circumstances change – especially in the first 12 months – then you may find yourself in a situation where the vehicle is worth less than the loan.
This is called negative equity and can limit your options if you need to sell the car quickly to remove the financial obligation.
A deposit can act as a buffer between the value of the asset and the size of the loan to prevent this scenario from occurring.
No Deposit Car Loan Example
If we assume that 100% of the purchase price will be financed, then we have a total loan of $22,400 in this basic scenario:
- Purchase price: $20,000
- Establishment Fee: $500
- Broker Fee: $900
- Comprehensive Insurance: $1,000
- Loan to Value Ratio: 112%
- 5 year loan term @ 8% interest
So on the day you take out the loan your car will be worth far less than the amount you have borrowed.
…And it will take two full years of repayments for that value to catch up (assuming a 15% depreciation rate).
How a Car Deposit Benefits You
If you can afford to make a deposit then reducing the loan payable can be beneficial to you in a number of ways.
Lower Repayments
A smaller loan means lower minimum repayments. You can choose to pay extra to repay the loan faster if you can, but you can also preserve your cash flow for other priorities in your life.
Freedom of choice in your household budget can be an important quality of life factor.
Protects You from Negative Equity
The above scenario discussing repossession is not a fun experience for anyone. It is stressful and could p[potentially ruin your credit history.
Paying a deposit upfront and lowering your initial borrowings can protect you from this in the future.
Life can change fast and having the option to sell your car to repay the loan in full can give you peace of mind that you will not end up in a situation you are unprepared for.
Greater Chance of Loan Approval
A smaller loan reduces the risk for the lender and can be viewed favourably.
Saving a deposit also demonstrates that you are managing your budget responsibly and have surplus cash flow at the end of each month.
All things that a lender likes to see and will increase your chances of getting your application approved.
Why Some Lenders Will Ask for a Deposit
Even though it is a secured car loan, the lender is still exposed to significant losses if you do not make your repayments.
As you can see from the above scenario, the vehicle is worth less than the loan. You then must account for the costs of repossessing the car, and the cost of selling it if it was repossessed after non-payment.
To reduce some of the risks a lender requires a deposit as part of a conditional car loan approval to achieve the following.
Reduces Loan-to-Value Ratio
A deposit of $1,000 would have reduced the LVR to 107% in the above scenario. It doesn’t sound like much of a difference but it would mean the value of the car is equal to the loan after the first year.
This reduces the lender’s exposure to loss significantly.
Increases Chance of Recovery
If you do not repay the loan and the lender must repossess your car then a deposit increases the likelihood of the sale proceeds covering the loan amount.
This gives the lender more comfort and also reduces your own personal risk.
If you are in genuine financial trouble you could simply sell the car to repay the loan. Avoiding default fees and controlling the sale price can mean a better outcome for you.
Lower Repayments
The more you pay upfront, the less you have to borrow, which leads to lower monthly repayments.
This can reduce the load on your household budget and provide further comfort to the lender that you can maintain your repayments over time.
How Much Deposit Do You Actually Need?
As discussed, in most cases you do not NEED a deposit when buying a car on finance.
However, if you have bad credit and are deemed high risk you may be required to pay something upfront.
This can range from a specific dollar value (E.g. $500) to a percentage of the purchase price. Up to 10% is most common.
However, if you voluntarily pay a deposit then you will benefit from the lower repayments and LVR we have covered. The lender may assess you as lower risk – increasing the chance of approval.
If you are unsure if you need a deposit for your car loan or not, then get in touch with our brokers below for an initial assessment of your options.
Alternatives to a Deposit for Your Car Loan
If you want to lower your repayments or the size of the loan relative to the value of the vehicle then there are additional easy to achieve this.
Trade-Ins
If you already own a car, trading it in can serve as a deposit and reduce the amount you need to borrow for your next car.
The trade-in amount reduces the amount payable, and you are only borrowing the difference between this value and the purchase price.
Balloon Payments
A balloon payment is a lump sum that is paid at the end of the loan term. You make interest-only repayments on this portion of your loan and you pay down the principal on the remaining portion.
While a balloon payment does not lower your total loan amount, the structure of it reduces the size of your repayments.
This is only appropriate in some scenarios and is a more expensive option than paying a deposit upfront.
Conclusion
A deposit can save you money, reduce risk, and improve loan terms.
But if saving a deposit isn’t feasible, a no-deposit car loan can still get you behind the wheel sooner – just at a higher cost.
The best option depends on your financial circumstances, credit history, and long-term goals.
Our expert car loan brokers at Gusto Finance can help you understand what is most suitable for your circumstances.
Submit an inquiry below and our team will get to work.
