With most car finance deals, you need to give some kind of initial deposit. But you may still be able to buy yourself a car without putting anything down upfront. Here's what you need to know about no deposit car finance.
Car finance deals without an upfront deposit? It is possible.
Let's imagine you’ve just fallen in love with your dream car. It’s sitting there on the forecourt, all gleaming in the sunshine, and only one obstacle remains to overcome: paying for it.
In an ideal world, you hand over the cash and drive it away. However, many of us require some kind of financial assistance to be able to afford it.
It's no surprise that the motor industry is also keen to help find a solution – and has helped drive an increasing reliance on car financing solutions.
Most car finance options require a deposit, but there are still deals for buyers that can't put money down upfront.
What is no deposit car finance?
It may sound too good to be true, but there is such a thing as no deposit car finance. Whether it’s the right option, however, depends on your personal circumstances.
As its name suggests, you walk into a showroom and leave as the proud owner of a new vehicle – without having to hand over a penny upfront.
Fierce competition between rival manufacturers has resulted in an increasing number of such deals being made available to potential buyers.
How does no deposit car finance work?
There are 2 ways you can finance your car without needing a deposit. The first is to pay for the car using a personal loan. These agreements don't usually require cash up front so you can just stick to the monthly repayments.
Otherwise, most no deposit deals are made available through personal contract purchase (PCP) agreements. They are rarely available via hire purchase (HP).
PCP allows you to pay for the car with monthly repayments for a fixed period. At the end of the contract you have 3 choices:
- Return the car
- Make a larger, 'balloon' payment to buy the car outright
- Start a new PCP agreement with another car
With a personal loan you pay for the car outright, so you become its legal owner from the outset. With a PCP arrangement, you only ever be the legal owner if you buy it at the end of the term.
Pros and cons of no deposit car finance
The most obvious benefit of car finance with no deposit is you don’t pay anything upfront. This allows you to put the money you’d have spent on a deposit to work elsewhere if required.
While PCPs generally have lower monthly payments than HP, this depends on the terms of the agreement.
However, there are downsides. If you go for car finance without a deposit then your monthly payments are likely to be higher. Therefore, you may end up paying considerably more over time.
The so-called 'balloon payment' due at the end of the term – if that’s the option you're going for – could also end up being larger. Bear this in mind before arranging car finance without a deposit.
What do the experts say?
Always read the small print when getting car finance with no deposit and establish how much you’ll end up repaying in total, warns Justin Modray, founder of Candid Financial Advice:
“No deposit deals can look tempting but ensure you won’t end up paying through the nose for a car overall,” he says.
This includes checking the price you’re being charged for the car. Can you negotiate a discount on the car or get a better deal elsewhere, perhaps by comparing finance deals online?
“Most dealers are happy to push finance as they’ll earn a commission, but this ultimately comes out of your pocket,” adds Modray.
Looking for finance on a new car?
What else do you need to consider?
There are plenty of potential challenges that you need to consider. So before signing any agreement you need to read the terms closely and clarify anything that’s confusing.
For example, there may be mileage restrictions associated with a car finance deal – and charges for exceeding these limits.
The car should also be inspected for damage and wear at the end of the contract. Anything classed as excessive may result in you being penalised or having to pay for repairs.
It’s also worth checking about servicing and maintenance. The contract may stipulate when it needs to be serviced – and place restrictions on who can carry out the work.
Also, some PCP contracts impose a limit on the number of days your car can be out of the country.
Of course, personal situations change. You may find yourself out of work or in such financial difficulty that you want to get out of the contract.
But, to end the deal early – known as a voluntary termination - you must have paid half the value of the vehicle. If you haven’t, you need to pay the difference first.
What do I need to qualify?
To qualify for a personal contract purchase or personal loan you need to pass a credit check – so it’s worth casting your eye over your credit history to ensure there are no red flags.
But, even if your credit history is good then you still need to ensure you can afford the monthly payments. Monthly payments are likely to be higher on 0% deposit car finance deals.
It’s important to scrutinise your finances before agreeing to a car financing package. You should consider the running costs of the cars you’re considering as these can vary enormously.
For example, the vehicle tax is decided through a combination of fuel type and carbon dioxide (CO2) emissions. Car tax rates are split into different tax bands: fewer emissions means less tax to pay.
It’s also important to remember that car financing is a competitive business. Do your research, find out what deals are available and don’t be afraid to shop around before making a final decision.
How long will it take to pay off a no deposit car finance deal?
How long you have to pay off a no deposit car finance agreement depends on the deal you arrange.
If you buy the car with a personal loan, you can decide the term of the loan, based on how much you can afford to repay each month.
Personal loans typically run for between 3 and 10 years - the shorter the loan the higher your monthly repayments are, but the less you pay in interest and the faster you can clear your debt.
PCP agreements work differently and contracts are usually set for 2, 3 or 4 years.
Can I get a no deposit deal with bad credit?
You may be able to find no deposit car finance deals if you have bad credit. But, you're likely to be considered a higher risk by lenders, which means your monthly payments might be higher.
Unfortunately, the fact that you aren't able to put to give a deposit isn't going to count in your favour when you're applying for credit. This is especially the case if you also have a low credit score.
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