Car finance is a great way to help spread the cost of owning a car into affordable payments. Monthly payments are made till the end of an agreed term and can be over a number of years. At the start of your agreement, you may be required to put down a deposit contribution. Some lenders even require a 10% deposit towards your next car purchase so it's worth keeping in mind. Depending on the type of finance agreement you choose there can be different options for putting down a deposit and also how beneficial they actually are.

What is a deposit for car finance?

A deposit contribution is an amount of money given by the customer to the dealer at the start of the finance agreement. Some deals require a 10% deposit in order to secure the vehicle, but others can come with no deposit to pay. It can be possible to get cheap finance cars with no deposit but having a larger deposit can also help to reduce your loan amount. The amount you put down is completely up to you but generally a bigger deposit can lower your payments. However, this can differ depending on the form of finance you choose.

How do deposits affect hire purchase?

Hire purchase is a secured loan which means the finance lender buys your chosen car from the dealer and you repay the lender. You can choose to put down a deposit at the start of a hire purchase agreement, but some lenders do require a deposit so it's worth checking beforehand. A deposit contribution is non-refundable and goes towards the loan amount. Deposits for HP can also be beneficial if you are struggling to get approved for a car loan.  

  • A larger deposit can help to reduce the loan amount. Within a hire purchase, the value of the loan with interest is split into equal monthly payments. When you put down money at the start of your agreement, you are reducing the total loan amount. This can help to pay your loan off faster or equals to lower monthly payments because the loan will be smaller.
  • You pay less interest when you borrow less. Interest rates are very influential to car finance and can make a massive difference to how much your finance deal costs. Your interest rate can be lowered by a larger deposit, or you can take out a smaller loan which means you'll not pay interest for as long.

Are larger deposits better for Personal Contract Purchase?

Deposits work a little differently for PCP agreements and in most cases a deposit for PCP cars is required. No deposit is only really offered to customers who have an excellent credit history. Unlike like HP, PCP benefit from low monthly payments because much of the loan value is at the end of the deal in the form of a balloon payment. Another difference between HP and PCP is that PCP has more restrictions. You will need to agree to keep the car in good condition and also within an agreed annual mileage at the start of the deal. 

  • Use a deposit to lower your monthly payments. It's a common finance myth that a small PCP deposit is best. However, a larger deposit can help to lower your monthly payments. Dealers may encourage smaller deposits as they could earn more commission when you borrow more money so don't be afraid to insist on putting as much down as you would like.
  • A deposit can reduce your balloon payment. The balloon payment at the end of your agreement is a large payment that needs to be made if you wish to keep the car. For many drivers, this payment may be unrealistic as it can be thousands of pounds to pay in one lump sum. If you do wish to own your car though, having a bigger deposit to put down can help to reduce the balloon payment and could make it more affordable to take ownership of the vehicle.