How Car Loan Down Payments Impact Your Financing

If you’re considering buying a new car, you might be thinking about taking out a loan to help pay for it.

You’ve probably thought a bit about what you can afford to pay in repayments, and about your total budget for your new vehicle.

But have you thought about what kind of down payment, or deposit, you might be able to make?

Here are a few things to think about.

What is a car loan down payment?

A car loan down payment, or deposit, is a sum of money that you pay up front when you buy your car.

This isn’t always essential, but it can reduce what you need to borrow to buy your car, and it may help if a lender assesses that you don’t have a considerable amount of borrowing power.

The amount you put down can vary widely depending on your individual circumstances and the car you’re buying. An amount such as 10 per cent or 20 per cent could be reasonable – but in some cases it may not be required at all.

Why opt for a small – or no deposit?

Some people opt not to worry about a deposit, or only offer a small one.

This means you do not need to have money saved, and you may be able to get on the road more quickly in your new vehicle.

But it does mean that your loan is likely to be larger, and you may have a higher interest rate if the lender assesses it as higher risk, with no money of your own contributed.

Why choose to make a bigger down payment or deposit?

If you have the money, making a larger payment can be helpful. It reduces the amount you need to borrow to buy your vehicle, which means a smaller loan with potentially smaller monthly repayments – or a shorter loan term.

You may be able to access lower interest rates if the higher deposit means the lender views your risk favourably.

But it could take a significant amount of time to save up enough cash for a large deposit, which could delay the car-buying process.

How do down payments affect interest rates and loan approval?

In some cases, the size of your down payment or deposit on your car loan can affect your loan application.

Sometimes, a larger down payment is seen as reducing the lender's risk. You’re offering a vehicle of the same value as security to the lender, but are only borrowing a smaller percentage of it.

This may mean you are more likely to get a loan approved compared to someone who wants to borrow an amount that is equal to 100 per cent of the purchase price of the vehicle used as security, subject to meeting all other lending criteria. For this reason, you may also be offered a lower interest rate, which can reduce the total cost of the loan.

The impact on loan terms and monthly payments

When you offer a larger deposit on your car, it may mean a shorter loan term or more affordable monthly payments, because you will have less of a loan to pay off.

If you choose to pay a small deposit or not bother about a down payment at all, your loan will be bigger, so you will probably have a longer loan term or higher monthly payments.

How to determine the right down payment for your car loan?

If you are thinking about your next steps, there are a few things you might like to weigh up.

What’s your budget? How much money you can comfortably offer as a down payment will affect your decisions.

What are your financial goals? If you want to limit your borrowing, it might make sense to save as much of a deposit as you can to reduce what you need from a lender.

What are your options? What sort of terms are lenders likely to offer you at different deposit levels? Knowing how much of a difference it will make to your individual situation can help drive your decision.

Should you save for a larger down payment?

Whether it’s worth taking the extra time to save up a larger deposit will depend a lot on your individual circumstances.

At better finance™, we can advise you on the potential savings that you might make, and you can compare that to the time it might take to save the additional amount.

If you need immediate access to a vehicle, it may make sense to get going with whatever deposit you have now. But if you have time, you can consider all the factors of your personal financial situation to determine the appropriate strategy for you.

To sum up…

The size of any car loan down payment or deposit can make a difference in how your overall loan works.

A larger down payment may mean lower interest rates and a shorter loan term, and can sometimes increase your chances of loan approval.

But saving takes time, and you might need to use that cash for other things.

As you’re deciding your next steps, you’ll need to weigh up your options and choose an approach that works for your overall financial life.

If you have any questions about car loans or any personal lending, get in touch with the expert team at better finance™. We’re here to help.