Although the common perception is that you need a deposit in order to take out a car loan, many would be surprised to realise that this isn’t always the case. Sure, some lenders will give you a difficult time without putting down any money. However, these days there are lots of providers who are willing to consider alternative arrangements that will see you in a position to secure that car you’re eyeing. Before you pursue this option however, pay attention to these issues.
Higher Loan-to-Value ratio
As you are opting to apply for a car loan without a deposit, the nominal value of the loan will be a higher amount. That is, you are asking the financier to lend you more money than you otherwise might if you laid down a deposit. Each financier will operate with different guidelines regarding the threshold of funds they lend with respect to the value of the asset (car) – ultimately, the loan-to-value ratio (LTV). With a higher loan value your interest repayments will be greater, so make sure you use a car loan calculator to assess your repayment capacity under different circumstances.
Don’t think that you’re not giving up anything
While a financier might agree to issue a loan without a deposit being put forward, it would be naïve to think that the lender isn’t taking something in return. This is because the lending institute will issue a secured loan, meaning it has some form of security acting as collateral – effectively, an insurance policy in the event of non-payment or late payments. This security will likely be the car itself, although if the car is expected to depreciate quickly, the financier may opt for another more stable asset to secure the loan.
Not all terms come equal
Whether we agree or disagree, some financiers will view a no-deposit car loan as another element of risk, notwithstanding the above collateral. As such, they may opt to refine the standard terms of their contracts to account for things such as administration fees, establishment fees, early payment fees and the like. After all, car financiers are in business to make money, so it’s wise to exercise caution before you sign the dotted line.
Inspect the contract thoroughly to ensure the terms seem comparable to a normal car loan. If anything raises concerns or catches your attention, don’t hesitate to flag it with the lender. Failing a satisfactory outcome, you can always explore your other options. One word of warning – do your homework and ask these questions up front before you apply for the loan, otherwise you will have a credit query recorded against your credit history.
The Fincar team is here to help you with all your financing needs. Contact us today to help arrange your next car or equipment loan.