Last updated: 22/10/2020 | Estimated Reading Time: 4 minutes
What is a deposit contribution?
A deposit contribution acts as a discount on the deposit you need to secure your vehicle by giving you some money towards this. A deposit contribution is often offered as an incentive by car lease companies to help persuade you to pick certain car finance deals, especially a Personal Contract Purchase. Because they are often used to push you towards certain deals, many people do not trust deposit contributions. However, they are actually quite straightforward and can save you a lot of money, making them very important when choosing the right car finance plan for you.
In This Guide:
- How does a deposit contribution work?
- What are the advantages of a deposit contribution?
- What are the disadvantages of a deposit contribution?
How does a deposit contribution work?
If you are looking to buy a new car on finance, you might be offered a deposit contribution by either the car manufacturer or the dealer. Deposit contributions are only available for certain car finance deals, and are almost exclusively limited to customers planning to buy using finance. They work by giving a certain amount of money towards paying the deposit of the vehicle, acting as a discount that reduces the overall cost of your finance plan and thus the vehicle.
For example, if you pay £1,500 towards your deposit, and you receive a deposit contribution of £1,000, your total deposit will be £2,500. This £2,500 will then be taken off the total cost of the vehicle, therefore reducing the cost of your finance plan and making your monthly payments cheaper.
A deposit contribution does not reduce the total cost of your vehicle but it does act as a discount for you - a discount you are awarded for choosing a certain finance plan. As such, you should trust that a deposit contribution could benefit you, as long as you are fully aware of how they affect your car finance deal as a whole.
What are the advantages of a deposit contribution?
When buying a car on finance, a deposit contribution is essentially free money or a discount without any strings. This is especially true if the contribution comes from the car manufacturer as part of a national promotion, as this means that you know that this money is coming directly from the manufacturers themselves. The deposit contribution in these cases can be seen as a reward for choosing the finance plan that the manufacturer prefers. This is why you will only be offered a deposit contribution with certain car finance deals, and never when paying in cash, as the car manufacturer disprefers this.
If you were not planning on purchasing a car on finance, you could still get a deposit contribution by taking out the minimum amount of finance needed to be offered this discount, and then paying off the balance of the finance as soon as possible (typically after the first monthly payment). While you may be charged a fee for doing this, the fee will probably be a lot less than the deposit contribution, and so you would still save money overall.
What are the disadvantages of a deposit contribution?
As with all financial decisions, before accepting a deposit contribution offer it is important to make sure you have looked at the whole finance plan, and whether it is the right fit for you in the long run. It is possible that the deposit contribution is offered for deals that come with a higher interest rate than usual, to the point where the money you save initially is cancelled out by the greater interest you will have to pay overall.
If the deposit contribution comes from the car manufacturer, it may be offered because the higher interest rate will end up costing you more than another finance plan, but one that doesn’t include a deposit contribution. Alternatively, if the deposit contribution is offered by the dealer, this money is probably coming from the profit gained by the dealer from selling the car, or from the commission of the finance deal. Again, this could mean that the deposit contribution will end up costing you more in the long run.
To make sure that you are getting the best deal for you, be sure to compare car finance deals and look particularly at the interest rates that come with paying for a new car on finance. The right deal for you could include a deposit contribution, or it could be a different finance plan with no discount on your deposit but with lower interest rates in the long run.