When looking to make a large purchase – such as a car or a motorbike – with the help of a loan, saving up for a loan deposit is often the greatest hurdle you’ll have to overcome.
Luckily, in many cases, it is actually possible to obtain a car loan or motorbike loan without a deposit. However, this type of no deposit vehicle loan is subject to several variable circumstances, which we will walk you through below.
The Loan to Value Ratio (LVR)
Before agreeing to forward funds to their client for the purpose of purchasing a vehicle, a lender will value the asset (i.e. the car or motorbike that their client has chosen to purchase). They will then lend the customer a certain percentage of that asset’s value.
This is called the Loan to Value Ratio, or LVR.
The LVR is calculated by dividing the loan amount by the book value of the vehicle, and showing it as a percentage. For example:
A loan applicant is looking to purchase a vehicle that has a book value of $20,000. The price of the car is $18,000, and the client has also chosen to purchase an extended warranty valued at $2,000. If the total borrow amount is $20,000 – the full book value of the vehicle – then the LVR will be 100%.
The amount of LVR lenders are willing to finance for a car or motorbike loan varies from lender to lender. While some may only lend 100%, other lenders may be happy to fund 150% or even 180% of the vehicle’s value. Provided the amount you wish to borrow is under your lender’s LVR guidelines, it can often be that you will not have to pay a deposit.
Read more on Loan to Value Ratios.
When Do I Need a Deposit to Obtain Vehicle Finance?
Although a deposit may not always be required to obtain vehicle finance – such as when the vehicle loan is under the lender’s LVR guidelines – in most cases a deposit may help to strengthen the loan application. In other cases, the lender may require you to pay a deposit before they will be willing to finance your vehicle.
For example, if your vehicle of choice is in above average condition or has had some enhancements made to it, the vehicle may have a sale price higher than its book value. This may cause problems with having the loan meet the required LVR. In such cases, a trade-in or cash deposit may assist in reducing the LVR, hence helping the client to obtain vehicle finance.
Sometimes, a lender may ask for a deposit from their client for other reasons. For example, some commercial car loans that do not have full financials provided may require substantial deposits to reduce the lender’s level of risk and exposure.
In many cases, a customer looking to obtain a vehicle loan from a financial lender will not have to provide an upfront deposit. As long as the borrow amount is under the lender’s loan to value ratio (LVR) guidelines, loan applications will often be approved without a deposit.
However, even if it isn’t always necessary, a deposit will often help to enhance the strength of your application. Not only does a deposit help to reduce the LVR exposure for the lender, but it is also an excellent way to show that you have made genuine savings and are in a sound financial position.
If you require more information on LVRs or no deposit car loans, contact Rapid Finance on 1300 467 274.