No-deposit versus low-deposit vehicle loans: Which is better for Kiwis?

If you’re taking out a loan to buy a new or used vehicle, you might be wondering whether it’s worth putting down a deposit.

It’s been estimated that about 70 percent of New Zealand vehicles are purchased with some sort of lending, and many of those loans will have had no deposit, or a small one. Here’s what you need to know if you’re considering a low- or no-deposit loan, including the risks that may be involved and who the loans may suit.

What is a deposit in vehicle finance?

In the context of a car or other vehicle loan, the deposit is the amount you pay toward the purchase. If a car is priced at $25,000, for example, you might put $5,000 down and finance the remaining balance.

A deposit can sometimes make an application more appealing to a lender because it shows you have put some collateral into the purchase and have demonstrated the discipline to build up a lump sum.

A deposit may also mean a lower loan amount, which may reduce the risk to the lender and make it cheaper for the borrower.

What is a no-deposit vehicle loan?

A “no deposit” loan is one where the loan covers the full purchase cost. As a buyer, you don’t put any of your own money into the purchase upfront.

No-deposit loans might be used for people who are in a hurry to buy or replace a car and do not have time to save a deposit, or who have a high income but limited savings.

Often, lenders will require that a borrower who wants a no-deposit loan have a good credit score and stable income, so that there is more reassurance that the person can pay the loan back.

What is a low-deposit vehicle loan?

A low-deposit loan is a loan in which the borrower contributes only a small amount upfront.

A typical low deposit loan range in New Zealand might be anything from 5 percent to 10 or 20 percent of the purchase price. Depending on the purchase price of the vehicle, this might only be a small amount, but it can make it easier for some borrowers to getapproved, or to find favourable loan terms.

No-deposit versus low-deposit vehicle loans: Key differences

Pros and cons of no-deposit vehicle loans

Here are a few things to think about if you are deciding whether a no-deposit loan is right for you.

Pros

• You may have faster access to a vehicle. You won’t be waiting around while you save up a deposit; you may be able to act immediately.
• You can work with your purchase timeline, either when the car you want becomes available or when you need to make the purchase.
• A no-deposit loan can be very useful in time-sensitive situations.
• If you have a high income, you may be able to pay the loan off quickly enough that no deposit is not an issue.

Cons

• The total loan cost is likely to be higher because you’re borrowing a larger amount of money, on which you will pay interest.
• You may pay a higher interest rate if the lender thinks your credit profile is riskier.
• You may have a higher chance of getting into negative equity if your loan balance is not reducing as quickly as the value of the car.
• You will need to have a plan to manage the loan if you need to sell your car or refinance before it is paid off.

Pros and cons of low-deposit vehicle loans

There are also factors at play when it comes to low-deposit options.

Pros

• Offering a deposit may mean you pay lower interest rates and have lower repayments over time.
• You may be more likely to find that your loan balance remains below the value of your car.
• It may be easier to refinance or upgrade your car later if your loan was smaller at the outset.
  
  

  Cons

• You have to save up the deposit, or be able to access it from somewhere.
• You may have to wait until you have the money in place before you make the purchase, which could be a nuisance if you find a car you want or if you need a vehicle quickly.

How does vehicle depreciation affect deposit decisions?

Cars and other vehicles lose their value over time, through a process known as depreciation. This is especially true for new cars, which have been estimated to lose 30 percent of their value in the first year.

All cars depreciate, and even used cars are often worth less each year. This is usually most noticeable at the start of your ownership. The percentage drop decreases over time as your vehicle ages. The type of vehicle you have makes a difference, too.

When you borrow without a deposit, you’re more exposed to the risk of negative equity – owing more than the car is worth – because you borrow the full purchase price. If your repayments do not reduce the principal as quickly as the car is depreciating, you may end up in negative equity.

Having a deposit, even a small one, could help your loan balance stay below the depreciating value.

How does deposit size impact the true cost of your car loan?

As an example, a $25,000 car with zero deposit will cost about $600 a month over five years on a 13.9 percent interest rate, with a total loan cost of $36,000. But if you had a 10 percent deposit and only borrowed $22,500 the repayment would only be $542 a month, and the total cost would be $32,520. Alternatively, you could clear the loan eight months early by keeping your monthly payment at $600 and paying only $31,200 in total repayments.

Which option is better for different buyers?

The right option often depends on your individual circumstances.

First-time buyers

You might be itching to get going and want to go straight to a no-deposit loan. Or you might have been saving toward your purchase for a while and have a deposit to put down to reduce your loan amount.

Young professionals with stable income but no savings

Often, when you’re starting out, all your available money is tied up in otherthings. If you have a high income, a no-deposit loan can be a good solution.

Families upgrading vehicles

If you can save a small deposit, it may give you more options with your loan, particularly if you can afford to take your time deciding about the purchase.

Self-employed individuals or contractors 

We can help you determine what you need to prepare to apply for a loan. This is usually not a problem, but it may require additional paperwork to verify your income.

People planning to sell or upgrade within two or three years

If there’s an upgrade on the horizon, it may make sense to pay a deposit to keep your borrowing smaller or to pay off your loan quickly. Otherwise, you’ll need a plan for what you’ll do with any loan balance that remains when it’s time to make your next move.

Common mistakes to avoid

Here are a few things it can pay to keep an eye out for.

Choosing no-deposit finance because it’s easier: It’s tempting to want to make a move quickly, but if you could save money by building up a deposit, it could make sense to wait.

Only thinking about the monthly repayments: It’s usually a good idea to get an idea of the overall cost of a loan.

Adding other costs onto a no-deposit loan: If you’re buying with no deposit and covering extra costs such as warranties or other add-ons, you’ll immediately be in negative equity. This might be appropriate, but it’s important to be aware of.

Borrowing the maximum you can: Lenders will assess what you can afford, but that doesn’t always mean it’s the right amount to borrow. You also need to be comfortable with any repayments you’re agreeing to, particularly if there’s a chance your circumstances might change in future.

Borrowing more because you have a deposit: Sometimes, people choose to take out a larger loan than they might have otherwise because they have put a deposit down. When they are not using the deposit to reduce what they need to borrow, they miss out on some of the benefits of having saved the deposit.

How to improve your chances of approval with or without a deposit?

There are a few things you can do to give your application agreater chance of success.

Strengthen your credit profile: Review your credit history to ensure it is accurate. If you have any defaults or outstanding payments, get them cleared as soon as you can. You can improve your credit score over time by ensuring you pay all your bills on time.

Reduce other debts: It may also help to pay off or at least reduce any other debt that you have.

Demonstrate stable income: If you’ve only just started in your job, you might find it easier to apply when you’ve had a couple of months of income. We can help you determine the best way to navigate this.

Get preapproval early: It’s often helpful to apply for preapproval before you start shopping for your new vehicle, so you know what you might be able to afford.

Frequently asked questions

Are no-deposit vehicle loans available in New Zealand?

Yes. We can help you determine what options might be available to you.

How much deposit do I need to get better car loan rates?

It varies based on a range of factors, including your loan application as a whole. Lenders will check your credit rating, stability as a borrower and income.

Can I refinance a no-deposit vehicle loan later?

You may be able to. We can help you work out whether that’s an appropriate solution for you.

Is it better to wait and save a deposit before buying a car?

Maybe, but maybe not. It may be more expensive to buy without a deposit, but in some cases it’s worth moving forward with your purchase.

Does a deposit affect my credit score?

No, as long as you make your repayments on time, there is no difference to your credit score between a no-deposit and a low-deposit loan.

Want to know more?

If you have questions about vehicle lending, get in touch with the team at better finance^TM. We are personal lending experts and can help you determine which loan option might be appropriate for you, whatever the size of your deposit.