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The Financial Benefits of Paying a Deposit on Your Car

IOL Reporter|Published

While the allure of driving off in your dream car without making an upfront payment can be tempting, taking the time to save for a deposit can offer substantial long-term financial advantages.

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In today’s fast-paced world, the idea of driving home in your dream car without having to pay a hefty deposit upfront can sound incredibly appealing. However, prospective vehicle buyers might want to hit the brakes and consider the myriad financial advantages that come with saving for a deposit before committing to a significant financial obligation in the form of an instalment sale contract.

Buying a new or pre-owned car is more than just a simple transaction; it’s a major financial commitment that typically spans several years. This long-term obligation deserves careful consideration, particularly when weighing the implications of upfront costs.

Paving the way for approval

Financial institutions often exhibit a preference for vehicle finance applications that include a deposit. Astutely, a deposit not only signifies financial discipline and commitment from the buyer but also serves to mitigate the lender's risk. By financing a smaller sum relative to the car's value, the buyer positions themselves as a lower-risk borrower, which can be crucial in securing loan approval, particularly for those with less-than-perfect credit profiles.

Driving down interest costs

One of the most compelling reasons to pay a deposit is its favourable impact on the overall interest paid across the term of the loan. A deposit decreases the amount borrowed, leading to a lower principal on which interest is calculated. This reduction not only results in lower monthly instalments but also a considerable decrement in the cumulative interest paid by the end of the loan term. Over several years, these savings can accumulate to a substantial sum, allowing individuals more freedom to allocate funds toward other financial aspirations.

Lebo Gaoaketse, Head of Marketing and Communication at WesBank, underscores these points: “In the context of managing the long-term total cost of vehicle ownership, the easiest way to reach the breakeven point and potentially upgrade to a newer car sooner is to pay a healthy deposit up front.” The swift progression towards breakeven, where the car’s trade-in value matches or exceeds the outstanding loan amount, is undoubtedly a financial advantage.

Impacting your loan term and monthly payments

A deposit also enhances flexibility concerning loan terms. A reduced loan amount might present the opportunity for a shorter repayment period. Although this could translate into slightly higher monthly payments compared to an extended term on the same reduced amount, it ultimately allows for quicker loan clearance and additional savings on interest. Conversely, current car buyers with tighter budgets who prefer lower monthly payments will benefit from a reduced loan balance, facilitating affordability over the standard loan term.

While these financial benefits are impressive in theory, seeing the numbers at play can provide even greater clarity. WesBank offers a user-friendly online Vehicle Finance Calculator, which allows prospective car buyers to enter various vehicle prices, deposit amounts, interest rates, and loan terms. Adjusting the deposit amount instantly displays how it influences estimated monthly payments and the overall cost of credit, empowering consumers to make well-informed choices.

“While saving for a deposit requires patience and discipline, the long-term financial rewards are undeniable,” Gaoaketse says. “Not only can it ease the path to finance approval and significantly reduce your interest obligations, but it also helps you to adapt to the budgetary changes that come with paying for a car.”

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