A happy Caucasian couple waving car keys from their new car in the air. A happy Caucasian couple waving car keys from their new car in the air.
A happy Caucasian couple waving car keys from their new car in the air.

A deposit is an important part of any car loan, and bad credit car loans are no exception.

From the lender’s perspective, it gives you some accountability and proves that you’re responsible enough to save that money. From your perspective, it reduces the amount you’re borrowing and impacts both your monthly payments and the total interest.

Getting to grips with this aspect of bad credit car loans could make a big difference to your bank balance and even your credit report.

What is a Bad Credit Car Loan Deposit?

A car loan deposit is simply a down payment that covers a portion of the car’s cost. Many lenders require a deposit (especially when the borrower has bad credit) and will insist on at least 10-20%. But there is no industry-wide requirement and it might be possible to get a car loan without a deposit.

Of course, “possible” doesn’t mean “advisable”, and there are many benefits to paying a deposit even when it’s not mandatory (more on those below).

Deposits are usually required for bad credit loans and should increase your chances of getting approved.

Factors Affecting the Required Deposit Amount

A bad credit car loan lender will tell you how much of a deposit you need. Some of the factors that the lender may consider when setting this requirement include:

  • Credit score/history: Your credit score is always considered when applying for a new loan. The higher it is, the easier this process will be. Low scores may be subject to stricter deposit requirements.
  • Loan amount: Lenders use an equation known as loan-to-value-ratio (LVR) to determine the total deposit needed. It’s usually set as 80 or 90%, which means the loan will cover 80/90% of the price. The remainder is the deposit.
  • Trade-in: A trade-in can often be used in place of a deposit, assuming it meets the lender’s criteria. If the vehicle is still financed, the deposit will be taken from the positive equity (when the market value is higher than the remaining principal).

Determining the Right Deposit Amount

Don’t sell yourself short when preparing your car loan deposit. There are other costs to consider, including insurance, fuel, maintenance, and future car payments. Going all-out now could leave you in financial distress further down the line.

It’s all about striking a balance between loan size and deposit size. The latter should be large enough to reduce the former without clearing you out.

There is no “ideal” amount, as it depends on your personal circumstances, but here are some stats to help you plan your budget:

  • Fuel costs an average of around $100 a week per household in Australia
  • Insurance and servicing add nearly $60 to household expenses
  • The average Australian car loan is around $32,000. Assuming a deposit of 10/20%, that’s between $3,200 and $6,400.

Deposits might be advisable, but they’re not always possible. If money’s tight and you’re struggling to make ends meet, that 10 or 20% deposit can seem like an unreachable goal.

In such cases, find lenders that don’t require deposits, but pay special attention to the loan term, monthly payment, and total interest to make sure the loan is viable in the long term. If not, it could be time for a rethink—get a cheaper car, save more money, or get financial advice.

For more assistance, contact Ume Loans today. We offer bad credit car loans at highly competitive rates and can ensure you get the best deal, along with invaluable advice.

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Pros and Cons of Different Deposit Sizes

Although deposits are mainly beneficial, there are some downsides. Before you rush off to start your bad credit car loan application, consider these pros and cons:

Pros of a bad credit car loan deposit

  • Smaller loan: If the car costs $50,000 and you have a $20,000 deposit, you’re only borrowing $30,000. As a result, the balance will be more manageable and you can pay it off in a shorter timeframe.
  • Less interest: Big balances accrue a greater sum of interest. By reducing the loan sum, you’re decreasing the interest as well as the principal.
  • Increased chances of approval: A bad credit car loan deposit of $20,000 is obviously more enticing to a lender than a deposit of $0. When their liability decreases, your odds of being accepted increase.

Cons of a bad credit car loan deposit

  • It takes more time: Saving for a deposit could take you a lot of time. It might mean delaying your purchase.
  • It leaves you with less cash: There’s no telling what the future holds. Spending most of your money on a deposit now could leave you with tough decisions to make if you’re suddenly hit with an unexpected expense.

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The Impact of a Deposit on Loan Repayments and Future Finances

To show you how impactful a car loan can be, let’s look at an example.

Let’s assume that you’ve got poor credit but have the option to skip the deposit. You need $40,000 for a new vehicle and are offered a 7-year loan at 11% interest for the full amount.

The loan would cost you $684.9 per month and you’d repay $57,531 over the term, amounting to a total cost of $15,789 in interest.

That’s over $2,255 per year and $187.9 per month in interest alone.

Now let’s suppose that you make a 20% deposit ($8,000).

Your monthly repayment drops to a more manageable $547,92, but you also pay just $12,631 in total interest ($1,804 per year; $150.30 per month), saving you $3,506 even when accounting for the additional $8,000.

But that’s not all.

Assuming you can afford the $684,9 per month (without a deposit), you can pay your 20% and then reduce the loan term to 5 years. In the end, you’ll pay a little more per month ($695,76) but will only spend $9,745 on interest over the term, saving you $7,786 in total.

Of course, this is just an example. There are fees and varying interest rates to consider (your deposit could even lead to a reduced interest rate and further savings). But it gives you an idea of how much difference a deposit can make.

Ready to secure your next bad credit car loan?

A deposit makes a big difference during the bad credit car loan application process.

  • It could save you money in the long term
  • It could improve your interest rate
  • It will make you more creditworthy in the eyes of borrowers

It’s important, however, to do your sums and make sure you budget correctly. Consider what you can afford and how much of a difference it will make. Don’t forget to negotiate either, as many lenders have some flexibility when it comes to car loans and might offer you improved deals if you tweak the terms.

When you’ve made up your mind regarding your deposit and are ready for the next step, contact Ume Loans. Our car loan experts can also answer any questions you have about deposits and bad credit car loans.