Do I need a deposit to get a car loan?

Do I need a deposit to get a car loan?

Whatever the reason you may be looking for car finance, having enough cash in the bank for a deposit might not be the first thing on your mind.

A deposit is an initial upfront payment that, in the case of a car loan, represents a percentage of the total value of the car.

While it’s not always essential to have a deposit for a car loan, some lenders may insist on it as a way of reducing risk.

Whether a deposit is required, and how big the deposit should be, will generally come down the lender’s maximum loan-to-value ratio (LVR), which is the percentage of the car’s value that the lender will allow you to borrow.

For example, if a lender’s maximum LVR is 80 per cent, you will be required to pay a deposit of at least 20 per cent of the car’s value. But if a lender’s maximum LVR is 100 per cent, you may not be required to pay a deposit at all.

Keep in mind, however, that even if you aren’t necessarily required to pay a deposit on your car loan, there can be a number of advantages to doing so.

In what ways could I benefit from having a car loan deposit?

If you are able to dip into your savings for a deposit, you may find that it could be beneficial for more reasons than one, including the following.

1. Increase your chance of approval
If you have bad credit, or no credit history, you might find that a deposit could help with the approval process. Lenders typically consider loans with a lower LVR to be less of a risk than loans with a higher LVR. If you’re not able to use your credit score to prove that you are a reliable borrower, a deposit could potentially help to get your application over the line.

2. Secure a lower interest rate
Having a deposit could open up more competitive interest rates as lenders often reward borrowers for lessening their risk. Some lenders may also be willing to negotiate the interest rate in order to gain your business.

3. Reduce your repayments
Paying a deposit on your car loan can also help to reduce your repayments and overall interest costs, as you will have less owing on your loan. Alternatively, if your budget allows for the repayment costs calculated without a deposit, you could leverage your deposit by shortening your loan term.

Take Karina, for example. Karina wants to take out a loan to buy a $30,000 car. She has enough money in her savings account to make a deposit of $5,000 but wants to weigh up her options first.

She begins by comparing loans and selects one that charges an interest rate of 6%.

Option 1: If she decides to keep her savings and refrain from paying a deposit, her estimated monthly repayments on a five-year term would be $580, and the total interest payable over the life of the loan would be $4,799.

Option 2: If she decides to use her savings to make a $5,000 deposit, her estimated monthly repayments on a five-year term would be $483, and the total interest payable over the life of the loan would be $3,999.

Option 3: If she decides to make a $5,000 deposit and shorten her loan term to four years, her estimated monthly repayments would be $587, and the total interest payable over the life of the loan would be $3,182.

Karina wants to prioritise saving money on interest charges, so she settles on the third option. She likes the fact that she would be able to save over $1,600 in interest charges compared to the no-deposit option, while only having to pay $7 extra per month. Plus, there’s the added bonus that she’ll pay off her loan a full year earlier.

   Option 1 Option 2  Option 3 
 Car value  $30,000 $30,000  $30,000 
 Deposit amount  $0  $5,000 $5,000 
 Loan interest rate  6%  6%  6%
 Loan term  5 years  5 years  4 years
 Monthly repayments  $580  $483  $587
 Total interest payable  $4,799  $3,999 $3,182

Source: RateCity.com.au. Notes: Based on excellent credit rating.

What else should I consider before using my savings for a car loan deposit?

If you’re in a position to be able to dip into your savings, or you have the luxury to take some time to save up, then it might be worth considering putting a deposit on your car loan.

However, if you can’t spare the cash and your need for a car is pressing, you may still be able to get a car loan that works for you.

It’s also important to remember not to use all of your spare change on a deposit, as car ownership comes with a number of other ongoing expenses such as registration, insurance and maintenance costs.

Deciding whether or not to pay a deposit on your car loan will ultimately depend on your personal financial situation. Doing your calculations and weighing up your options can help you make a well-informed decision.

For information and advice specific to your unique circumstances, consider reaching out to a financial advisor.

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Learn more about car loans

What is a loan-to-value ratio?

The loan-to-value ratio, or LVR, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have a loan-to-value ratio of 75 per cent. Loan-to-value ratios change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the loan-to-value ratio would now be 67 per cent.

What is an LVR?

The LVR, or loan-to-value ratio, is a percentage that expresses the amount of money owed on the car compared to the value of the car. For example, if you take out a $15,000 loan to buy a $20,000 car, you have an LVR of 75 per cent. LVRs change over time as you pay off your loan and your car depreciates in value. For example, two years later you might now owe $10,000 on your car, which might now be worth $15,000. In that case, although there would still be a $5,000 difference between the size of the outstanding loan and the value of the car, the LVR would now be 67 per cent.

What is a loan term?

The loan term is the amount of time the lender gives you to repay the car loan. For example, if you take out a $20,000 car loan with a five-year loan term, you would be expected to pay off the entire $20,000 (plus interest) within five years.

Where can I get a student car loan?

Student car loans are not a necessarily a product in and of themselves, but what you may be looking for is a guarantor car loan.

A guarantor car loan has a third-party act as a form of guarantee for your loan application, telling the bank or lender that if you default on your loan, someone will pay the loan repayments.

Going guarantor on a car loan is no new thing, and before internet-based credit scores, guarantor car loan applicants would apply for loans with a guarantor or property owner who could vouch for the person borrowing the loan.

To get a guarantor car loan, you’ll need someone willing to act as a guarantor for your car loan.

How to find a great car loan

Historically, finding a great car loan would require excess research ranging from visiting an excess of websites or making phone calls, but technology has moved on. Using RateCity, Australia’s leading financial comparison service, you can check out great deals from a range of lenders on the one site.

To start, select the amount you want to borrow and the length of the loan, narrowing your search to show just fixed or variable interest rate results.

Once you’ve indicated your search criteria, you’ll see an immediate list of lenders, ranked by interest rate or application fees. You’ll also be able to view the monthly repayment amount for each result, helping you to know what you can afford.

Up to six products can be compared side-by-side, complete with more information about each car loan, giving you more information about your options.

When comparing your car loan options, it’s ideal to keep in mind some points find a great car loan for your needs. Consider the following:

  • Choosing a low interest car loan can reduce costs
  • Selecting an option with low fees and charges is ideal, because these can really add up
  • Be aware of penalties, such as early exit penalties if you pay off the loan sooner than expected
  • Consider the features that best suit your situation

There are many ways to ensure that you get a great car loan. Ultimately, you’ll end up with the best deal by doing your research and selecting the most suitable product for you.

What is a secured car loan?

A secured car loan is a loan that is connected to a form of security, or collateral. Generally, the security for a car loan is the car itself. If you fail to repay the loan, the lender might seize your car, sell it and then use the proceeds to recover their debt.

How to get a chattel mortgage?

Both businesses and individuals may use a chattel mortgage, provided that the car is being used predominantly for business purposes. 

To apply for a chattel mortgage, you need to first consider your options and choose a suitable lender that meets your requirements. Once you have selected a lender, you can apply for the loan online by filling out a form. If the lender doesn’t offer an online application process, you can either call them or visit their nearest branch. 

After you’ve applied, the lender will ask you to supply documents that confirm your identification, income, job profile, etc. If everything is in order, most lenders will arrange the loan’s settlement, so all you need to do is pick up your car!

Can I get a discounted student car loan?

Being a student is tough enough, and while you might find the odd student discount on movies and technology, the same can’t be said about car loans, as you can’t really get a discounted student car loan.

Lenders make money on the interest and fees that they charge with loans, and the lowest interest and fees are given to the most reliable credit holders: people with excellent credit history.

As a student, you are unlikely to have enough on your credit report to warrant an excellent history. There are however, ways of getting a lower interest car loan if you can’t get an interest-free loan from the bank of mum and dad. One way of doing this may be through getting a guarantor car loan, which can get you a secured car loan by setting your parents up as guarantors.

I’ve been denied a car loan before; can I still get car finance?

Even if you’ve been denied a car loan before, you might still be able to get car finance. The key is to make the right application to the right lender.

The ‘right’ application is one that makes you look like an acceptable risk, which might include things like improving your credit score, increasing your savings rate and accumulating a bigger deposit.

The ‘right’ lender is one that deals with borrowers like you. For example, while some car loan lenders only deal with good credit borrowers, there are others that specialise in bad credit or poor credit borrowers.

How do you get a car loan?

There are four different ways you can get a car loan. You can go straight to a lender. You can get a finance broker to organise a car loan for you. You can get ‘dealer finance’ – which is when the car dealer organises a car loan for you. Or you can organise your own car loan through a comparison website, like RateCity.

Whichever method you choose, you will need to provide proof of identification, proof of income and proof of savings. So you may be asked for any combination of passport, driver’s licence, bank statements, payslips, tax returns and utility bills. You might also be asked to provide proof of insurance.

Can you get a chattel mortgage with bad credit?

Getting approval for a chattel mortgage with bad credit may be possible, given ‘chattel’ (usually a piece of equipment or car) is put up as security for the loan. That means if you fail to repay the loan, the creditor can recover the loaned amount by repossessing and selling the car or piece of equipment. This differs from unsecured car loans, where the asset is not tied to the loan and cannot be taken if you don’t meet the repayments. 

What is proof of income?

Before giving you a car loan, lenders will ask for proof of income – documentary evidence that you earn as much as you claim you earn. Lenders will typically want some combination of tax returns, pay slips and bank statements. The reason lenders want proof of income is because they want to be sure you have the means to repay the car loan.

What is CTP insurance?

CTP insurance, also known as compulsory third-party insurance or a green slip, is compulsory if you want to register a vehicle in Australia. If you’re responsible for a car accident, your CTP insurance will be used to pay any compensation due to anyone who might be injured or killed. However, CTP insurance doesn’t cover you for vehicle damage or theft.

What is a balloon payment?

Some lenders will offer borrowers reduced monthly repayments in return for a one-off lump sum – or balloon payment – that the borrower has to pay at the end of the loan. Generally, the total repayments on a loan with a balloon structure will be higher than a loan without.