How paying a deposit affects your monthly vehicle repayments

 Paying a deposit is a good financial strategy that offers numerous benefits including impacting your loan approval, reducing the interest you will pay and shortening the loan term.

Buying a new or pre-owned vehicle is an exciting prospect but not many South Africans can afford to buy a car outright or cash.

While there are a variety of financing models available to consumers today, an instalment sale remains the most popular way of buying a car.

An instalment sale consists of a motorist effectively loaning the money to buy the car from a financial institution or a bank and then paying it off over a period of three to five years, with interest.

These finance agreements can be structured in various ways, with varying loan periods, interest rates and residual values and with or without a deposit.

A deposit payment is an amount that the motorist will pay upfront, which will be deducted from the purchase price, with the remainder being covered by the instalment sale.

While a deposit was once almost mandatory in recent times many cash strapped motorists are opting for applying for finance without paying a deposit.

However, paying a deposit is a good financial strategy that offers numerous benefits including impacting your loan approval, reducing the interest you will pay and shortening the loan term.

Assisting with approval

While financial institutions take numerous factors into account when approving or declining a finance application, they are generally more inclined to approve applications that include a deposit. This is because a deposit demonstrates a level of financial discipline and commitment from the buyer. A deposit also reduces the lenders risk as they are financing a smaller percentage of the vehicle’s value. By contributing a portion of the purchase price, applicants present themselves as lower risk borrowers, which can

be a crucial factor in getting a finance application approved, especially if your credit profile is not perfect.

Reducing interest

One of the biggest advantages of paying a deposit is the impact on the total interest that you will pay over the term of the loan. In basic terms, when you pay a deposit, you borrow less money and the interest charged by the financial institution is calculated on a smaller principal amount. Paying a deposit results in lower monthly interest as well as lower cumulative interest paid over the loan term. Over a few years, these savings can add up to a substantial amount.

Furthermore paying a deposit presents you as a lower risk, which could also result in the financial institution offering you a lower interest rate.

The impact on the loan term and monthly repayments

By paying a bigger deposit, the loan amount will be less, which can allow you to opt for a shorter repayment period. This will mean paying off the car faster and saving on interest. If a lower monthly payment is your priority, a deposit will help achieve that, even with a standard loan term, making your vehicle more affordable on a monthly basis.

Take time to save for a deposit

While saving for a deposit can be a tricky task in today’s financial environment, the long-term benefits are certainly worth it. One way of tackling this is to put away the same amount of money as what your monthly payment will be for a couple of months before buying your new car. This has multiple benefits including allowing you to accumulate a deposit. At the same time, it will also get you ready for that monthly expense and allow you to make any adjustments necessary in order for your budget to balance along with this new monthly payment, before entering into a binding financial agreement. The Motus Select Affordability Calculator is also a great way of determining how much you can really afford.

Do the maths

While all this might sound like mumbo jumbo, actually doing the calculation on how a deposit affects the parameters in play can be a real eye opener. The Motus Select Finance Calculator is a valuable tool that can be used by consumers to input different vehicle prices, deposit amounts, interest rates and loan terms and determine how they affect the monthly repayment amount. By adjusting the deposit amount, motorists will be able to quickly see how paying a deposit versus paying no deposit will affect their monthly instalments and the total cost of credit.

Motus Select offer cars that meet every dream and budget, shop the extensive selection today at https://www.motusselect.co.za/buy-cars/all