Cars are often advertised as coming with a deposit contribution. But what exactly is a deposit contribution and are they a good deal?
Read this advice guide to find out.
- Deposit contribution definition
- How a deposit contribution actually works
- Why are deposit contributions offered?
- What are the advantages of deposit contributions…
- And the disadvantages?
What is a deposit contribution?
A deposit contribution is a chunk of money that a car manufacturer or dealer adds to the amount of money that you can afford to put down yourself when buying a new car. They are usually only available to buyers who take out a specific finance product to buy the car.
How does a deposit contribution actually work?
Take this as an example… You have £1500 to put down as a deposit on your new car. Normally, that amount would be subtracted from the price of the car and your monthly payments are calculated accordingly. The bigger the deposit, the lower the monthly payment.
If a manufacturer or a dealer is offering a £2000 deposit contribution, it gets added to your £1500 deposit. Therefore £3500 is taken off the full price of the car and your monthly payments are calculated accordingly.
Be aware that there may be a minimum amount of money you have to finance. Or, to put it another way, a maximum deposit amount you can put down, inclusive of the contribution.
Why are deposit contributions offered?
There are a number of reasons why deposit contributions are offered. A car manufacturer/dealer may periodically offer them across a number of cars as a means of drumming up sales at a time of year that usually sees a slump. They may be offered on a model that is not selling as well as hoped, or to clear stock of a model that is going out of production. Essentially, they are offered to tempt customers to buy their cars over a competitor’s and to tempt customers into taking out a finance product.
Be aware that deposit contribution offers are usually time-limited.
What are the advantages of using a deposit contribution?
You can regard a deposit contribution as a bit like a discount off the price of the car. They can also be helpful if you do not have much of your own money to put into the deal. It is possible that the minimum deposit with a £2000 contribution is £2001, so you only have to bring £1 to the deal. Though, again, the bigger the deposit you put down, the lower your monthly payments will be.
It is worth noting that using a deposit contribution offer may be the only way of getting a discount off the full price of the car in question.
Under those circumstances, it may be worth taking the deposit contribution even if you intend to pay with cash. You take out the minimum finance amount/pay the maximum deposit (inclusive of the contribution), then pay off the balance as soon as you are allowed to. This is typically after the first month. There will likely be an early settlement fee to pay, but you may still have saved a useful amount.
Are there any disadvantages to using a deposit contribution?
Deposit contributions do not necessarily represent the best value you can get when buying a new car – as we’ve mentioned earlier, the deposit contribution is sometimes reserved for buyers using certain car finance products.
Make sure the dealer presents you with a full quote for the deposit contribution deal they are offering and look carefully at the total amount of interest payable. It could be that you end up paying roughly the amount of the contribution more in interest than you would with another finance product.
To find out which way to finance a car is right for you, read Car Finance Advice Guide.
You could get caught out if you intend to use the part-exchange value of your old car as your deposit, as well. Let’s say you are looking at a deal with a deposit contribution of £2000 and a minimum deposit of £3500. It is possible that the dealer will offer you £1500 for your old car, neatly taking you to the minimum deposit amount. It seems like a good deal, so you take it. However, maybe in this case your car is actually worth £2500. So, the dealer is up £1000 when they sell your car on and you are on the hook for £1000 of finance you did not actually need to take out.
If you are planning on taking the old-car-as-a-deposit route, find out how much your car is worth before going to the dealer. There are loads of car valuation services online, or you could consult with other dealers about how much they would give you for your car.
If the contribution is being provided by the dealer rather than the car manufacturer, it could be that the sales staff are pushing the deal quite hard. They may be earning extra commission on it, after all. And the dealership itself may be paying for the contributions out of a commission it will earn for reaching a target in selling the car/finance product in question. If they miss the target, they could lose the commission and have to pay the contributions out of their profits. In which case, it is in the dealer’s interest to sign up as many people as possible.
Seems like there are a fair few catches here? No, not necessarily.
As with any finance offer, so with deposit contributions: do your research to make sure that the deal on offer is, in fact, the best value means of buying a new car.
Get quotes for other types of finance and find out how much your part-exchange is worth. If you can afford to put down more than the minimum deposit, it may suit you to do so. Keep your eyes open, ask lots of questions, do not submit to the hard sell and never be afraid to walk away from the deal if you are not happy with any aspect of it. That all applies no matter how you are paying for a car.
Should I use a deposit contribution offer, then?
If it gets you in the car you want and the numbers stack up, then absolutely. But, to reiterate, do your research, ask the dealer for a full quote, ask every question you have, and do not be afraid to walk away. There is always another car you could buy instead.