A car loan without a deposit works pretty much like a personal loan, just secured against the vehicle. You borrow however much you need to buy the car outright, then if you default on your repayments, your lender has the right to repossess it to cover their losses.
If you’re eager to get hold of your new car right away, you might not want to wait until you’ve saved up enough for a deposit. Many lenders give out car loans without requiring any upfront payment, but there are a few things you should know first.
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OurMoneyMarket – Car Loan Secured Fixed (Exceptional Credit) ($5k-$100k) (New) (5 Years)
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What’s the point of a deposit?
The bigger the amount you borrow, the larger your interest bill. The more you are able to put up in your deposit, the less you will need to borrow, so a hefty deposit is a great way to reduce the overall cost of your loan. Lenders are also more likely to approve car loans with a substantial deposit, because the Loan to Value Ratio (LVR) is reduced.
LVR measures the value of the loan relative to the asset used as collateral. If you have a home loan, you’re probably very familiar with how LVR can affect your borrowing capacity.
Less risk of negative equity
High LVR loans are riskier for a lender because they run the risk of negative equity should the asset depreciate. Due to the amortisation schedule of loans, at the start, you are paying off a higher proportion of interest than the principal - if you come into it with $10,000, you have more principal paid off and skin in the game.
Imagine you buy a car for $50,000, with a $2,500 deposit and $47,500 loan. Your LVR would be 95% (47500/50000*100). Now imagine that after six months, you have paid off $7,500 of the loan, but are now struggling with repayments.
At the same time, the used car market has shifted, and your car is now only worth $35,000. This means that if you default on your repayments to the point where the lender repossesses the car, they will make a loss, since reselling the car at auction will not be enough to recover the full outstanding amount. They will then likely come after you.
It’s a similar case if you fully write-off the vehicle in an accident and you are insured at market value where it’s worth less than your loan, or you opt to sell the vehicle. All three scenarios mean you could be left in a lurch.
Lenders might therefore be a bit more apprehensive about giving out car loans without a deposit, since this will nearly always mean an LVR of at least 100%. There is an insurance policy called ‘car gap insurance’ that covers you in the event of negative equity, but this is an additional cost.
How no-deposit car loans work
A no-deposit car loan allows you to finance a vehicle without paying anything upfront. Some car loans might require a deposit, which reduces the amount you borrow and shows the lender you're financially committed. With a no-deposit option, the lender covers 100% of the car’s purchase price, meaning you start the loan with zero initial cost. This can be appealing if you don’t have savings ready but still need a car.
When you apply for a no-deposit car loan, the lender evaluates your credit history, income, and overall financial situation to determine if you're eligible. Because the risk is higher for the lender, interest rates may be slightly higher than those for standard loans. You’ll repay the full loan amount in regular instalments, over a set term, which usually ranges from 1 to 7 years.
Here’s a quick overview of the key benefits and drawbacks of choosing a no-deposit car loan.
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Benefits |
Drawbacks |
|---|---|
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No upfront payment required |
Higher overall loan amount |
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Faster access to a vehicle |
Higher interest rates |
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Flexible loan terms available |
Stricter approval criteria |
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Good for buyers with urgent needs |
Depreciation hits full-loan balance |
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Use savings for other priorities |
May increase long-term debt |
While no-deposit loans offer flexibility, it’s important to ensure the monthly payments fit comfortably within your budget to avoid financial stress.
Eligibility requirements for no-deposit car loans
To qualify for a no-deposit car loan in Australia, lenders generally require:
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Proof of steady income through payslips or bank statements
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A strong credit history showing reliable debt management
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Employment details
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Vehicle information, including make, model, and price
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Valid ID, like a driver’s license or passport
Why wouldn’t I be able to get a no-deposit loan?
No-deposit car loans are common, but are riskier for lenders. There are several circumstances in which a lender might require a deposit before issuing a loan.
Maximum LVR requirements
Most lenders will have an LVR threshold that loans cannot exceed. If the loan required is too much relative to the vehicle, your lender might require a deposit to reduce the loan amount and bring down the LVR.
You have a poor credit history
As with any loan, your lender will do due diligence on your background, particularly your credit history. High LVR loans mean defaulting can put lenders in a tough spot, so they are likely to be even more rigorous when assessing loans with no deposit. If you have a history of unpaid bills and late repayments on other debts, it might suggest to your lender that giving you a loan without a deposit would be an unacceptable risk.
You have no credit history
It would be nice if lenders gave the benefit of the doubt to borrowers who haven’t had the chance to demonstrate their trustworthiness. Unfortunately, that isn’t the world we live in, and if you have no way to show your lender that you can be relied upon to make all your repayments, they will probably ask for a deposit.
Young people, students and retirees who have minimal credit history and regular income who are in the market for a car might find it far easier to be approved for a car loan if they can build up a deposit first.
You’re already in negative equity on your current car
Negative equity basically means that you owe more on your car than it is worth. It isn’t a great spot for your lender, who is likely to make a loss should you default, but it’s not good news for you either. If you are in positive equity, you can sell your existing car, pay off the loan and use the remainder to go towards your new ride.
Negative equity positions mean that if you decide to sell your car, you won’t be able to pay off the loan entirely, and will be left with residual debt. When you’re in the market for a loan for your next car, lenders will also take note of your negative equity position. They might require a deposit to make up for this shortfall.
Will I need to pay anything else?
You might not need a deposit to get your loan, but there are still usually several fees that you’ll need to pay. Look out for the following, which may be charged as a one-off payment or added to the outstanding amount you owe.
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Establishment fees that cover the administration costs of setting up your loan.
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Account-keeping fees could be an ongoing charge throughout the loan term.
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Exit fees that apply if you pay off your loan early, perhaps by selling the car.
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Late fees if you don’t manage to make your repayments on time.
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Upfront car costs like insurance and registration can add up to thousands. Many lenders will want to see proof of comprehensive car insurance before dishing out a loan.
What to look out for
If you’ve decided you don’t want to wait until you have a deposit saved, there are many lenders that give out low or no-deposit car loans. You’ll still need to check the following though:
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Eligibility. Some lenders may require a deposit on certain types of vehicles or those that exceed a certain price point.
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Loan insurance. Since no-deposit loans are riskier for lenders, some may require you to pay an extra amount to cover loan insurance that protects them. This could be a substantial amount, so it’s worth checking to see if this will be the case with your preferred lender.
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Interest rates. Like with any loan, the interest rate will probably be the biggest cost consideration. Lenders might charge a higher rate for riskier loans with low or no deposit, so it’s worth using our comparison tables to try to find the lowest rates going. It might even be a good idea to get a couple of different quotes to compare.
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