If you’re reading this, it’s presumably because you’re considering taking out a car finance deal for your next set of wheels – and that’s pretty understandable. After all, the recent statistics do point to the car finance market continuing to see strong business, so plenty of people are evidently still buying a car on finance in 2022.
But if there’s one tricky aspect that can arise when you’re considering your options for car finance, it is the deposit. You might ask yourself, “do I really need a deposit? And if so, should I go for a big deposit or a small one? And how will that affect me going forward?”
So, let’s start answering those questions, by explaining the situation in a really simple way.
How do deposits for car finance typically work?
Over the years, the process of a motorist arranging car finance has traditionally worked out as follows: the motorist applies for car finance, and if they are successful with their application, the lender will provide them with a high proportion of the loan value.
But as is the case when someone is trying to take out a mortgage for a house purchase, the lender won’t typically offer the would-be borrower the entire loan value. What they will expect, is for something to be paid upfront – in other words, the deposit.
While the deposit requested by the lender may not be exactly the same from one lender to the next, around 10% of the loan value is a good “ballpark” figure for what to expect if you are interested in applying for car finance so that you can get behind the wheel of your ideal car.
So, could it be a good idea to offer a larger deposit?
Now, if you’ve read this far, you’ve probably already realised that offering to pay a bigger deposit than the bare minimum requested by the lender, could bring you certain advantages. After all, the bigger the deposit is, the lower the overall value of your loan will be, because you won’t need to borrow so much to repay over time. And having a smaller loan could allow you to pay back the entire sum of money sooner.
That, in turn, could also be a source of reassurance for the lender – particularly if you have a less-than-glittering credit record. It is definitely possible to get car finance with bad credit, but having a history of failing to pay back your loans can also make it harder to convince lenders to agree to give you new loans. So, paying a larger deposit could greatly help to expand your car finance options.
But putting down a bigger deposit may not be the right path for everyone
So, are there any circumstances in which paying a larger deposit could be a bad thing for you if you’re seeking car finance right now? Well, yes – there could be a risk of paying a bigger deposit leaving you financially stretched in the long run, which could compromise your ability to keep up with repayments.
Let’s take a look at the specific example of someone paying a big deposit for a personal contract purchase (PCP) deal. This is the type of car finance where, if you want to own the car once the loan term comes to an end, you will need to pay a final ‘balloon’ payment.
This means that if, for instance, you were to take out a PCP agreement, with a big deposit and subsequent monthly repayments that you can only just manage to afford, there’s a strong risk that you will arrive at the end of the loan term without enough money to actually acquire the car permanently.
That might not seem like the greatest worry if you decide that you aren’t bothered about owning the car in the long run anyway. After all, the ‘balloon’ payment is only optional if you are on a PCP deal, and you may like the idea of switching to another car once this particular loan period concludes.
But in that situation, if you have ploughed basically all your money into that specific car finance agreement, will you have any cash remaining to pay the deposit on a new deal? That might leave you in the situation of having to pay a lower deposit on your next deal, and therefore being forced to pay more in monthly repayments.
There is, of course, the possibility in that situation that you could even find a car finance deal that doesn’t require you to pay a deposit at all – although it is also crucial to realise there is no guarantee of that.
In conclusion… it all depends on your requirements and situation
In summary, then, yes, paying a larger deposit does potentially help expand your car finance options. But depending on your financial circumstances both now and in the future, it could have the long-term effect of narrowing those options, too.
Every motorist’s situation is obviously different, so it is important to look carefully at your own circumstances, and consider what would be the most suitable path forward for you. And if you do wish to apply for car finance, at Car Finance Genie, they are ready and waiting to provide you with a free and no-obligation quote that is perfectly aligned with your needs.
