No-deposit car finance: how it works

Getting car finance without a deposit means you don’t need to pay any cash upfront – but does mean your monthly payments will be higher

Simon Ostler
Apr 30, 2022

If you're keen to make a purchase on a used car without any upfront payments, a no-deposit car finance deal is your best option. This can be a great way to reduce the immediate impact on your bank account if you're in desperate need of a car at a moment's notice, but it’s not without its downsides if you're looking for the absolute best value from your finance deal.

Opting for a car finance deal without paying any kind of initial deposit means you can take the keys and drive without having paid anything other than a reservation fee, and you won't have to pay anything until your first monthly payment is due the following month. How about that for a short-term win?

Well, once that initial excitement is over it's time to start your monthly payments, and it's worth being aware that you'll have much more per month to pay with a no-deposit deal than a setup where you paid a large deposit. That's because you'll be borrowing more money and therefore paying more interest - potentially over a longer period, too.

You’ll also need to have a good or excellent credit score to be accepted for no-deposit car finance. Lenders will seek to protect themselves from anyone they consider to be a high-risk borrower, especially when there is no money being paid prior to the initial monthly payment, as it takes longer for the company to get its money back.

No-deposit car finance: how it works

A typical setup when financing a nearly new or used car might be to make a reservation fee - which could amount to £200 or so - and apply for finance, with the option to request a no-deposit quote.

Once accepted, you won't need to make any payments before the car arrives. When it is delivered, you'll then have 30 days before your first monthly payment is collected. Your reservation fee may also be refunded to you during this stage.

For new cars, finance is normally arranged through manufacturer schemes, which usually work in a similar way.

Just remember that whatever happens, you'll need to be able to make the monthly payments every month from the start date onwards. While you have the choice not to pay an initial deposit, there is no option to miss or defer a finance payment.

No-deposit car finance: types of finance

A number of popular types of car finance are available with a no-deposit option. This includes PCP finance, which can be one of the more cost-effective ways of purchasing a used car, too. It's flexible and more affordable than some other finance options because your monthly payments only cover part of the car's cost - the value that it's expected to lose during the length of the contract.

At the end, you can either return the car with nothing left to pay (provided you've stuck to the pre-agreed mileage limit and kept the car in good condition), buy it for a pre-set lump sum known as the optional final payment, or you can take that final payment and refinance it.

If the vehicle is worth more than the optional final payment, then you'll also have the option of trading it in for another one, with the difference - known as equity - put towards the deposit on your next finance deal. The more equity your initial car has, the more it will reduce monthly payments on your new one.

Hire Purchase finance is also a possibility. This has higher monthly payments than PCP, but your monthly payments cover the full value of the car. This means that - unlike with PCP - you automatically own the car once you've made the final monthly payment, with no large lump sum left to pay. As a result, you're free to keep it or sell it at this stage.

No-deposit car finance: requirements

The precise requirements to be approved for no-deposit finance vary depending upon the lender, but the biggest requirement is a strong credit score. No-deposit finance is generally only offered to drivers who have a good credit rating, and a proven record of paying back money on time - as it involves borrowing more money than equivalent finance contracts where initial deposits are paid.

Everyone seeking finance is put through an affordability test to ensure that the payments won't put them into financial difficulties. The test becomes harder to pass without a deposit because the monthly payments on a no-deposit loan are higher.

Interest rates may be higher if you don't put down a deposit, too, because this involves borrowing more money. This makes it harder for finance companies to recover the outstanding debt if you have repayment problems - particularly near the beginning of the contract, when the car is typically worth much less than the total amount owed.

That's why it usually pays to put down a deposit if you can do so: you're more likely to secure a lower interest rate and end up paying less in the long run.

No-deposit car finance: which cars can I get?

New, pre-registered, nearly new and used models are all available with no-deposit car finance from many providers. Manufacturers regularly offer no-deposit options on brand new cars that are built to your specification. You'll need to configure a car and then ask for details about finance offers.

This is a quick way to get very high monthly payments, though, as purchasing a car brand new is typically the most expensive way to buy a car and putting down no deposit increases monthly payments further, as you're borrowing more money for longer and a greater amount of interest will be totting up, too. If this suits your cashflow situation better than putting down a large deposit, though, it could enable you to get into the car you want sooner.


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