Car finance: how much deposit should I pay upfront?

Placing a larger deposit means smaller monthly payments and lower interest charges but could cause future issues. Keep reading for more info

Christofer Lloyd
Sep 30, 2019

Putting down a larger deposit is a simple way to reduce your monthly payments with car finance - provided you have the cash to hand. Whether you sign up for a PCP finance deal or Hire Purchase (HP), paying more upfront shrinks your instalments and the amount of interest you pay.

So, paying a little more initially with Hire Purchase can be a good way to cut how much you have to pay in future, since you automatically own the car once you’ve made all the monthly payments, with nothing else to pay.

That means that at the end of the contract you can keep the car, sell it if you need to free up the cash or trade it in for something else. However, the impact of putting down a large deposit with PCP finance is a little more complicated.

PCP car finance: large deposits can cause issues

That’s because paying as much as you can upfront with a PCP deal might shrink your monthly payments, but could cause issues in the future - especially if you spend your whole monthly budget, without putting anything aside for your next finance deal.

 

Stretch yourself by maximising your deposit, followed by monthly payments that are just about affordable and you’ll have nothing left to cover the optional final payment that you must pay if you want to buy the car with PCP.

That means you’ll need to look for a new finance deal at this stage and find money for another deposit. If you’ve ploughed all your cash into the previous car, you’ll have nothing left for this and will consequently face higher monthly payments for your next car.

Get more car for your money with a large deposit

This could mean the difference between getting the car you want or having to trade down to the next cheapest model or further still. Say you put all the cash you have - £5,000, for instance - into a deposit and spend your entire monthly budget to get a Volkswagen Tiguan 1.5 TSI 150 2WD Match. The car would then set you back £282 per month (four-year, 10,000-mile-per-year contract).

At the end of the contract you’d need to find a hefty £10,881 to buy the car outright - impossible if you spent all your cash on the deposit and your whole budget on monthly payments, meaning you’d have to hand the car back and take out another finance contract if you wanted another car.

Say you were very lucky and the car you handed back had lots of equity in it - being worth £2,000 more than the remaining finance balance - and put this towards your next deposit. That deposit and near-identical monthly payments of £281 would get you a Volkswagen Golf 1.5 TSI 130 Match 5dr - a smaller, less powerful and cheaper car (again on a four-year, 10,000-mile-per-year contract). This means you'd get a sub-£23,000 car for a similar monthly payment to what you initially paid for the £28,000 Tiguan.

If, however, you came to the end of the original Tiguan finance deal with no savings for a deposit and no equity to use, the news is even worse. Your £282 budget with no deposit would only get you a Volkswagen Polo 1.0 TSI 115 SEL - an even smaller, less powerful, less well equipped car - worth less than £19,000 - all for the same monthly payment as the Tiguan.

So what type of deposit do you choose to get a car that appeals now but also leaves enough to put towards your next car? This really depends on how much cash you have to begin with and how much you can save each month towards your next car.

Hire Purchase finance: large deposits make sense

If you want to get Hire Purchase on a decent car now, without getting yourself into financial difficulties, the right deposit to put down varies depending upon how much cash you have to begin with and how much extra you can spare every month after your everyday bills.

With HP you need to consider your income and your outgoings. If you’ve got little in savings but a reasonably high income, paying less upfront should be fine. If you can stretch to £1,000 or £2,000 upfront, however, even that’s enough to reduce your monthly payments a little and cut down the amount of interest you pay.

Your relatively high monthly income, meanwhile, should make the larger monthly payments affordable, too, and hopefully leave a little to save for your next car or to put into a rainy day fund.

If, however, you have a lower income but greater cash savings, placing a larger deposit to make your monthly payments more affordable is the way to go. A brand new £25,430 BMW 118i Sport would set you back an enormous £583 per month on a four-year Hire Purchase contract with no deposit.

Putting down a £3,000 deposit, however, reduces that to £514, while £5,000 upfront cuts that to £469. If you could stretch to £10,000, though, that falls further to £354 per month.

PCP finance: choose a medium deposit if you plan to finance your next car

So how much is the right amount to put down on a PCP finance scheme to get a good car for your money without having to trade down when you come to the end of the contract?

If you can meet the monthly payments and have enough money left to put something aside for your next deposit - saving £100 per month over a four-year contract would leave you with a substantial £4,800, for instance - putting down a substantial cash deposit can be a wise move.

That same brand new VW Polo that was £282 per month without a deposit above (four-year, 10,000-mile-per-year contract), becomes just £169 per month with a £4,860 deposit - the highest you can put down on this car. If those low monthly payments leave you enough income to save for your next car deposit, then you’re in a good position.

If, however, you can’t stretch to such a large deposit, putting £2,500 down cuts payments from £282 per month to a more palatable £224 per month.

Put a little cash aside or save every month for your next finance deal

The key thing with PCP finance is not to spend all your cash on a deposit AND all of your left over income on monthly payments. Do that and you’ll always end up in the tricky position of not being able to afford the same car next time around - unless your salary has increased markedly.

However, put a chunk of cash aside at the start of your contract or a little money every month and you should be in a much better position next time around. To work out how much you can afford for your next car, read our guide to how to budget for your next car.

Whether you have £5,000 in cash to begin with and put all of that towards the car and then save more each month thanks to the lower monthly payments or you put £2,500 down and then save half as much each month or pay nothing upfront and put the £5,000 aside for your next car, you should be able to afford a decent car now and be in a good position to get the car you want for a monthly payment you can afford when you get to the end of the contract.

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