When you apply for finance for your new car, you will normally be asked to pay a deposit.
The lender typically does not provide 100 per cent of the loan value, so you will normally have to pay something in advance, often about 10 per cent of the total value.
But you may be able to pay a larger deposit if you want to. So why should you consider doing this?
Here’s a guide to the main reasons.
Pay Lower Interest Rates
This is the main benefit of paying a large deposit when you apply for car finance. When you pay a larger deposit, you end up taking out a smaller loan. Because you are borrowing less money, the overall risk for the lender is lower.
As a result, they are more likely to offer you a lower interest rate.
This means that the total amount you pay back may end up being considerably lower, so you end up paying less for your car and your payments are more manageable.
When you pay for a car outright in cash, you don’t pay any interest, so this is the cheapest option.
But if you cannot afford a whole car but can pay a large deposit, you can reduce the amount you end up spending.
Pay Back Your Loan Faster
When you pay a larger deposit, the overall value of your loan will be smaller. That means you will normally be able to pay it back sooner because there is less to pay back overall.
So if you don’t want to be paying back your loan for a long time, you could pay a larger deposit and then pay back the total amount sooner. Or you could spread it out but make smaller payments each month that are more manageable.
A Good Option if You Have a Bad Credit Record
You may have a bad credit record or a CCJ. In this case, paying a larger deposit could help you to get finance in the first place.
Many car finance providers are willing to provide finance to people with bad credit records. But they won’t loan to anyone, and you may need to take certain steps to increase your chances of getting accepted.
This can include getting registered on the electoral roll or being able to provide proof of your income in the form of payslips.
Paying a larger deposit is another option. It shows that you have some money to pay already, and it also reduces the size of the loan and therefore the risk the lender is taking.
Consider Paying a Larger Deposit
As you can see, there are several reasons why you may want to consider increasing the size of your deposit when you apply for car finance.
But every situation is different. You may find that you would rather pay the smallest deposit possible or even find a lender who does not request any deposit.
So look carefully at your circumstances, work out how much you can afford to pay back each month, and then start looking at your options.