Do you need a car loan deposit when looking to finance a new or used car?

Updated On October 19th, 2022By Dynamoney

If you are looking to finance a new or used car, you may have been wondering if you will need a car loan deposit. In most cases a deposit isn’t actually required in order to obtain car finance. Most lenders offer full price finance allowing you to secure a car loan for the entire purchase amount. There are however a few situations where a car loan deposit will actually be required for loan approval. For instance, if you don’t have any credit history, if you owe more on an existing car loan that what your car is worth (only applicable if you are trying to refinance an existing car loan) or if you have an extremely bad credit history.

Whilst car loan deposits aren’t generally required, they are a common practice to reduce monthly repayments and the total amount of interest paid over the life of the loan. Putting down a deposit of say 10-20% reduces your overall credit risk which in turn may result in a lower and more competitive interest rate.

What is a car loan deposit and how do they work?

A car loan deposit is an upfront partial payment on your car loan. In essence you pay a portion of the purchase price at the start. A car loan deposit will help to reduce your loan to value ratio (LVR). A car finance lender will run an LVR calculation to determine the overall risk of your car loan application. For example, an LVR of 60% means that the car loan you are applying for will cover 60% of the purchase price, whilst the remaining 40% will be covered by a car loan deposit. A lender will see a higher car loan LVR as higher risk and therefore may charge a higher interest rate to cover potential losses should you default on your car loan repayments.

Benefits of car loan deposits

Lower interest rates

Putting down a car loan deposit can potentially reduce the interest rate on your loan. The lender will see you as a lower risk borrower and therefore be likely to offer a more competitive interest rate.

For example, if your loan is for 100% of the purchase price and the car costs $45,000, at 6.5% p.a over five years, your repayments would be $880.48 per month with $7,829 paid in interest.

However, if you buy the same car but pay a car loan deposit of $9,000 this means you have 20% equity in the car, to begin with. The lender sees this as lower risk and gives you an interest rate of 6%. In this instance you will only pay $5,759 in interest over five years and your repayments will only be $696 per month.

Less interest paid

Borrowing a smaller amount of money naturally means overall you will pay less interest over the life of the loan. Even a car loan deposit of a few thousand dollars could mean savings of hundreds of dollars over the course of the loan.

Increased chance of approval

When you pay a car loan deposit, the lender will see you as a lower risk borrower which in turn increases your chances of loan approval. This can be particularly beneficial if you have a bad credit rating.

More manageable repayments

By putting down a deposit you will be borrowing less money which will also mean less interest to pay. Your repayments will also be smaller due to the reduced loan amount and interest rate, which allows more money for other expenses, or potentially paying off the loan faster.

Cons of car loan deposits

If you don’t have funds ready to go, saving for a car loan deposit can take time and therefore may delay purchasing your new or used car. If you need to purchase a car sooner rather than later and don’t have money for a loan deposit, applying for 100% of the purchase amount might be the better option for your situation.

Instances where a car loan deposit is required for a loan application

The borrower has no credit history or a bad credit history

If you have never previously had a loan or have a bad credit rating, then it is likely that you will be required to put down a deposit on your car loan. It is standard practice for lenders to assess the risk of your loan application before approving the go-ahead.

Non-existent or poor credit history is often seen as a higher risk, as it gives the lender less certainty that you will pay back your loan without default. If you have failed to repay loans in the past or gone bankrupt, finance companies and banks will be less willing to lend money without a deposit to offset the risk.

You owe more on your existing car than it is worth

If you are looking to refinance an existing car loan and the amount left owing on your loan is larger than the value of the car you will be required by the lender to pay a car loan deposit.

How much deposit do I need for a car loan?

Most lenders typically suggest a minimum 10% deposit. A deposit of this amount should reduce the interest payable as well as the amount of each monthly repayment. Remember the larger your deposit, the less interest you need to pay back and the lower your monthly repayments. A car loan lender will assess your income, debts and expenses to determine your ability to repay a car loan. Putting down a deposit also shows the lender your ability to save and to be conservative with your money which works to your advantage.

What if I am unable to put down a car loan deposit?

At Dynamoney, we offer car loans for 100% of the purchase price of the vehicle depending on your credit score. If you are looking to purchase a new or used car with 100% car finance, contact one of our experienced lending consultants today.