HP and PCP deposits: how much should I pay?
Placing a larger deposit means smaller monthly payments and lower interest charges but could cause future issues. Keep reading for more info
Putting down a larger deposit at the start of a car finance deal is a simple way to reduce your monthly payments - provided you have the cash to hand. Whether you sign up for a Personal Contract Purchase (PCP) finance deal or Hire Purchase (HP), paying more upfront means you have less to pay later, and cuts the amount of interest you pay overall.
With this in mind, 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 you can keep the car at the end of the contract, 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. If you put too much down at the start of the contract you may find yourself in a tricky position when the contract ends. So keep reading to understand how much deposit to put down.
PCP car finance: large deposits can cause issues
Paying as much as you can upfront with a PCP deal might shrink your monthly payments, but it could cause issues in the future - especially if you spend your whole monthly budget, without putting anything aside for your next finance deal.
Stretching yourself by maximising your deposit and paying large monthly payments that are just about affordable means you’ll have nothing left to cover the optional final payment that you must pay if you want to keep the car with PCP.
That means you’ll need to look for a new finance deal at this stage and find the money for another deposit. If you’ve ploughed all your cash into the previous car, you’ll have nothing left for the deposit and will consequently face higher monthly payments for your next car.
If your salary has stayed the same that might mean that you have to trade down to get a smaller or less desirable car for the same per month as your previous car - albeit with no deposit. If you want the same car as before, however, you're simply going to have to pay more money each month.
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 high-spec Volkswagen Tiguan 1.5 TSI R-Line (pictured above). The car would then set you back around £315 per month (four-year, 10,000-mile-per-year contract, correct as of January 2022).
At the end of the contract, you’d need to find a hefty lump sum of almost £12,000 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.
Alternatively, you'd have to refinance the optional final payment, though this involves paying a second set of interest on the car and if you know you want to own the car you'd be better off going for a Hire Purchase contract at the beginning. In this example, we're assuming that you don't want to refinance the original 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 slightly higher monthly payments of £325 would get you a bog standard Volkswagen Golf 1.0 TSI Life - 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-£25,000 car for a similar monthly payment to what you initially paid for the £35,000 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. £300 with no deposit would only get you a Volkswagen Polo 1.0 TSI R-Line - an even smaller, less powerful car - all for similar monthly payments to the Tiguan.
So what scale 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. Whatever your situation, it's wise to make sure that either you keep some cash saved or are in a position to save a reasonable chunk every month so that you are able to get to the end of the contract with a similar amount of cash or more to put 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 have 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 £30,000 BMW 118i M Sport would set you back an enormous £685 per month on a four-year Hire Purchase contract with no deposit.
Putting down a £3,000 deposit, however, reduces that to £617, while £5,000 upfront cuts that to £571. If you could stretch to £10,000, though, that falls further to £456 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.
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 leftover 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.