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When to pay that car deposit

Apr 4, 2019

When to pay that car depositOne of the more frequent questions I get asked is whether it makes sense to pay an upfront deposit when buying a car. It seems that dealerships are advising customers not to pay the deposit upfront, but rather to make a lump-sum payment 24 months into the contract as it has a bigger effect on reducing your monthly repayments.

While this is true, what people are not calculating is the interest you save in the first 24 months if you had paid the deposit on inception.

Listen to Maya and Mapalo Makhu discussing this and other topics on the My Money, My Lifestyle weekly podcast.

If you are purchasing a car you need to be careful of the information provided by the dealership. They may be incentivized to sign up a larger financing deal. You need to rather look at the financing costs over the full period.

Faisal Mkhize, Managing Executive of Absa Vehicle and Asset Finance provided the following car finance figures based on a purchase price of R300 000. This is an initial repayment term of 60 months at an interest rate of 12%.

Option 1: No deposit

Your monthly repayment will be approximately R6 673 and total repayment over a 60-month term amounts to approximately R400 399.

Option 2: R100 000 upfront deposit

Monthly repayment will be reduced to approximately R4 449 and total repayment over a 60-month term amounts to approximately R266 933. This equates to a R33 466 saving in interest repayments compared to paying no deposit.

Option 3: No upfront deposit, R100 000 payment at month 24

At inception the monthly repayment will be approximately R6 673 and total debt repaid by month 24 will be around R200 917. A lump-sum payment of R100 000 is then made at month 24 of the contract reducing the amount owed to R100 917.

You can opt for the monthly repayment to reduce to R3 351 and the term remains unchanged. So the outstanding balance is repaid over the remaining 36 months.

As you can see in this example, the monthly installment is reduced to R3 351 compared to R4 449 if you paid the deposit upfront. This may appear to be saving you money, but in this scenario the total repayment over 60 months is R280 828.

This is R13 895 more than if you had paid the deposit upfront. Even if you had invested the R100 000 earning 6% for the first 24 months, you would earn around R12 000, which is still not sufficient to cover the savings if you paid the upfront deposit. The higher the interest rate on the car finance, the more money you save from an upfront deposit.

When taking out any credit agreement, always look at total cost, not the monthly installment.

Table detailing the three options

This article first appeared in City Press.

29 Comments

  1. Is it normal to pay for a car before you actually get it?
    They say they need to see the money reflect in the account before I can collect it?
    Do I have the right to then ask for

    Reply
    • It is a difficult one because they obviously don’t want to hand the papers over until they know they are paid. Is this a owner-seller or through a dealer?

      Reply
  2. Hi Maya I bought a car from a dealership I gave a deposit of R26k ( the car was 45k) I didn’t have finance from any institute I paid from my own pocket monthly instalments for the remaining 19k. I paid for about 7 months but got behind on my payment afterwards about 4 months.
    They repo my car and done nothing further. Am I allowed to get my deposit back or a portion of it?

    Reply
    • Who did you buy it from? Legally they have to sell it and give you back the difference between what they sold it for and what you owe

      Reply
  3. Hi Maya

    What if there is a special for a car right now but I will only be able to get the deposit in four months time, should I go ahead and get the car and put in the extra payment after four months? Are the implications for four months the same as the 24 months in your example

    Reply
  4. Hi Maya,

    I am looking to buy a car, I wanted my repayment term to be 36 months but I was advised by the dealership that the bank will charge me a higher interest if I opt for a smaller repayment period instead of the 60 or 72 is this true?

    Can I look for my own financing or is the responsibility on the dealer?

    Reply
  5. Hi there so i am looking to buy a car of total R190 000 .

    I have 110 000 cash on hand. I plan on settling this car as soon as possible is it a good idea to not pay any deposit (0%) and save the money and add to it to settle the entire bill in 12 months since debt is cheap now?

    Reply
    • Debt may be cheap but you still pay more interest than you earn in the bank so it doesn’t makes sense to wait

      Reply
      • Hi Maya, I’m looking to buy a car on a fixed 3.5% interest rate I can give an R 80 0000 deposit. My thinking is to not give the R80 000 deposit and put the money in a fixed deposit at the bank I can get 7% there. Am I correct assuming that I will only save R 2800 per year but get R 5600 per year in the fixed deposit or does it not work like this. Thank you

        Reply
        • that is a very low rate – who are you financing through? If you are getting financing at that rate and can get 7% for a deposit, then it could make sense to keep it in the fixed deposit

          Reply
  6. Hi Maya i bought a vehicle on the ad the price was R136600 but when the Offer to purchase arrived they added accessories that totaled R162767 and the F and I advised me there is no deposit needed my installments would be wirh a balloon payment R2557.00 , with lknkable interest 2770, with fixed premium R3075

    Can i put in a deposit of maybe 6 or 9 % which can make my premium lower and interest as well

    Reply
  7. Dealer said my work payment is little ,so idecided to give him deposit of 40 000,price car is 89000,no deposit insta)ment is 1999.so they called me now and say my intstallemt is 1550 for 72,but after calculating this money,total amount of installment is 111600 plus 40 000 of deposit total payment is151600,their interest is 61600 is it normal.

    Reply
    • I used the Nedbank car finance calculator and it shows for a 10% interest rate you would pay R1000 per month over 72 months. If the interest rate is 12% it would be R1050 per month.
      So it seems very high – shop around for other finance deals

      Reply
  8. Hi Maya. I found a car somewhere the purchase price is 169999. I want to pay upfront deposit of 40000. Is it possible to negotiate interest and ask the dealership to only lend me 129999? What is reasonable interest percentage that I can start to negotiate from?

    Reply
    • I would shop around for car finance. Dealerships make commission out of the loan size so they tell people not to pay a deposit! You can definitely put down a large deposit and finance a smaller amount. The finance depends largely on your credit history but a good rate is around 2% above prime. Also find out about all the other charges dealerships add to the final price…

      Reply
  9. Good day I paid a deposit to order a vehicle that was not in stock and signed the offer to purchase agreement. But the dealership cannot supply a delivery date. Shouldn’t the dealership then keep my deposit an interest bearing account in the meantime?

    Reply
  10. I did get preapproval for car finance the vehicle is 180 000, trade in on my vehicle is 60 000, with no deposit and balloon payment, installment is 3400 after trade in reduces to 2300, is it better to pay the deposit to the bankin a weeks time or to the dealership when applying for the finance. Interest rate is at 11 percent..

    Reply
    • You can pay the deposit upfront. Please let me know if the dealer tells you if affects your interest rate negatively. This is absolutely NOT true and dealers say this to try get a higher financing deal. I am working on a story about this…

      Reply
  11. Hi Maya, what if you put down a deposit of 10% upfront and an additional 10% of the purchase price at month 24?

    Reply
    • Compared to 20% upfront? remember the earlier to pay off debt the less interest you pay. But you need to balance this with having liquid assets for emergencies. so you may have 20% deposit but no emergency funds – would be more sensible to pay only 10% and keep the other 10% for your emergency fund

      Reply
  12. And how would the total repayment look if one paid a deposit upfront and then later a large lump sum? Does this help reduce the total payment in any way?

    Reply
    • any additional payment helps reduce the interest you pay. The sooner the better

      Reply
  13. Thank you very much Maya. the education you give on your articles goes a long way, God bless you.

    Reply
  14. Hi, Maya but what if i had invested that R 100 000 say with African bank at 13,3% (as advertised) over 5 years and not pay the deposit at all.

    Reply
    • Keep in mind that the African Bank advert is compounding. I think it is actually 10%.

      Reply
    • To add a point – if you do not have an emergency fund, then keeping the R100k liquid would be a good idea.

      Reply

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Maya Fisher-French author of Money Questions Answered

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