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The lowdown on deposits and car loans

Posted on 05 November 2015

Any new vehicle purchase – whether it’s pre-loved or fresh off the showroom floor – brings with it additional cost. Getting new wheels means looking at the budget and doing some number crunching to work out what’s affordable.

If you’re arranging finance for your new vehicle, one of the first things you’ll need to think about is whether or not you want to put a deposit down.

What is a car loan deposit?

First, let’s look at what it isn’t. A car loan deposit isn’t the same as a deposit that holds something until you pay in full (like booking a flight or hotel). It’s also not the same as when a car dealer or private owner requests a deposit to hold a vehicle that you’re interested in until you can arrange the finance.

So what is it? A car loan deposit is an upfront, part payment on your new vehicle. Depending on the cost of the vehicle and your servicing capacity – fancy lingo for how much you can afford to pay off over time - you may be able to choose whether or not to pay a deposit upfront to your car loan lender when arranging your car finance. In short the options are: (1) pay a portion of the asking price upfront (the deposit) and the remainder over time, or (2) pay the total cost of your new wheels over time with no upfront deposit.

Deposit or No Deposit?

Often it’s a simple question of whether you have the money to spare for a deposit at the time you need to buy your new vehicle. We help a lot of Kiwis with no-deposit car finance when the budget can’t stretch to a deposit upfront.

There really is no right answer – it all depends on how you want to manage your car loan and your budget. Having said that, we’re fans of Kiwis making good financial decisions – decisions that are good for you today and for your future. So whether you choose to pay a deposit upfront or not, here are a few things you need to know.  

Paying a deposit reduces the total amount of interest paid on your car loan.

It’s pretty straight-forward (but all too easy to forget) – the larger the amount you borrow, the more interest you will pay over time. Here’s a quick comparison to illustrate:

Scenario one: You buy a car with an asking price of $10,000. You take a car loan out for the full amount over three years – i.e. no-deposit upfront. Over the three year loan term, you will pay back $11,778.*

Scenario two: As above, you buy a car with an asking price of $10,000. You take a car loan out for 80% of the value with a 20% deposit down. Over the three year loan term, you will pay back $9,422. Add your initial deposit of $2,000, and your car has cost a total of $11,422.*

Paying faster versus deposit upfront

If you don’t have the money spare for a deposit, if affordable (budget friendly now and manageable on an ongoing basis), loan term is another way to reduce the total cost of your car loan if you decide not to pay a deposit. 

For example, you buy a car with an asking price of $10,000. You decide not to pay a deposit and instead choose to pay the loan off quicker – in two years instead of three. Over the two year car loan term you will pay back $11,180*. Thinking back to our earlier scenarios, that compares to $11,778 with no deposit over three years or $11,422 over three years with a $2,000 deposit paid upfront.

Balancing car loan affordability

Cash in the bank equals financial security, so it’s important to take a look at your budget and consider how your money can work hardest for your needs. If you can comfortably put a deposit down, it’s a good idea and will save you in interest costs. If losing the safety-net of cash in the bank may make meeting your repayments difficult and put other budget needs under pressure, it can be better to spread the cost of your car loan over time. The important thing is to get the balance right for you and be crystal clear on how the options compare in terms of cost. 

Weigh up the options, crunch a few numbers and go car shopping with confidence. If you would like to talk through whether paying a car loan deposit upfront is the right option for you, give the team at Online Car Loans a call. We’ve helped thousands of Kiwis get on the road with a car loan that works for their budget.

*Assumes Online Car Loans finance rate of 10.95% and excludes any fees.  Actual interest rate is determined on application.

Please note, this article does not represent personal financial advice.

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