Understanding how your Cash Deposit affects your Car Finance Options

Cash deposit is the amount you need to pay in the beginning while purchasing a car under PCP or HP. In both HP and PCP deals, usually the deposit is between 10% of car price. In case of a car lease, usually the deposit is the total of three monthly installments.

Example 1:

You are considering to purchase a Fiat 500 Hatchback worth £11,900 under PCP or HP. Before purchasing the car, you will be asked to pay a deposit of 10%, which is £1,190 before taking delivery of the car.

How does cash deposit affect you?

A key advantage of a cash deposit is it reduces your total principal owed to the car financer. This way, a higher deposit can help in reducing the monthly installments as well as total interest paid. In certain PCP deals, usually there may be a limit on how much maximum deposit can be paid. Volkswagen has set a limit of maximum 30% deposit of the total amount. Honda has set a maximum deposit limit of 35%. This limit is set by car loan providers to maximize their profitability. If you pay a higher deposit they make less money.

Example 2:

You are considering a new Fiat 500 Hatchback worth £11,900. You want a loan for 48 months at an interest rate of 10.5%, and you are being offered a GMFV of £4,300. If you are paying a deposit of £1,000, your monthly installment will be £168.98, and your total amount borrowed will be £8,111.04 (car price less GMFV plus interest.) Suppose you increase the deposit to £4,000 with all the other terms of the deal remaining the same. Your monthly installment will come down to £92.17, and in total you will be repaying only £4424 inclusive of interest.

In some cases, a dealer may make full or part contribution of the deposit, resulting in a lesser or even a zero deposit for the customer. Volkswagen currently offers a £1,000 dealer contribution on the new Polo when purchased under PCP. The customer still has to make a deposit of £2,460 on the total cash price of £12,435.00. Mazda offers a £500 deposit on its Mazda2 1.3 5dr, which results in a zero deposit for the customer.

iCalculator tip:

If you have the cash, you should try to pay the maximum deposit possible. A higher deposit significantly reduces monthly payments, the total interest paid, and the total amount borrowed.

Use our online PCP calculator to calculate how different cash deposit amounts can lead to difference in your monthly and overall car loan expenses.