“What is the difference between a discount and a deposit contribution?” – asked by Tracey D.
Many car manufacturers advertise a deposit contribution as part of a finance offer on a new car – and sometimes on a used car. But what is the difference between (for example) a £2,000 discount and a £2,000 deposit contribution? After all, it’s £2,000 that the customer doesn’t have to pay, right?
With a normal discount, a seller offers any buyer a reduction in the price of the vehicle, regardless of how the customer is paying for the vehicle. Simples. The problem with that plan is that the discount comes directly out of the seller’s profit margin. So a £2,000 discount on a £20,000 car means that the customer saves £2,000 but it costs the seller £2,000.
A deposit contribution means that the manufacturer and/or dealer and/or finance company is giving you an amount towards the car, but with strings attached. And the key string is that you have to take the manufacturer’s finance to get the deposit contribution (and sometimes, it has to be a specific finance plan like a PCP, rather than any other finance plan they may offer).
So a £2,000 deposit contribution means that the seller is still taking a £2,000 hit up-front, but they get to make at least some of it back (or possibly even more than it originally cost them) in finance profit over the following years.
How does a deposit contribution affect me?
Well, that depends on how you are financing your car. In some cases, it makes virtually no difference to the customer at all whether you are getting a discount or a deposit contribution. If you are financing the car through the dealership anyway, then a dealer giving you £2,000 off the car’s price is the same thing as them giving you £2,000 towards the car’s price – it’s £2,000 you don’t have to spend.
However, if you are not planning to take the manufacturer’s finance offer then you won’t be eligible for the deposit contribution, meaning you have to pay the extra £2,000. This means you need to work out whether or not it’s cheaper for you to still pay by your planned method, or take the manufacturer’s finance and claim the deposit contribution.
Even if you have got a lower interest rate from another finance company or bank, it might still cost you more than using the dealer’s finance and getting the cash from the manufacturer. So get your calculator out and crunch your numbers carefully.
Can I get a deposit contribution without taking their finance offer?
Officially, no. To be eligible for the deposit contribution, you will almost certainly have to sign up for the dealer’s finance plan. However, there is usually a loophole in the contract which you can take advantage of…
How to claim the deposit contribution without taking the finance
Any PCP or HP car finance offer sold at a car dealership in the UK is a regulated agreement subject to certain legal provisions. One such provision is that you can cancel your finance agreement within 14 days of it being activated, with no penalties or charges and no affect on your credit score.
So if your plan is to pay cash for your new car, you can:
- Sign up for the manufacturer’s finance offer. which allows you to take advantage of the deposit contribution
- Take delivery of your car
- Immediately cancel the finance
This will result in the finance company immediately invoicing you for the amount borrowed, which you pay them with the cash you were going to use anyway.
Isn’t there some kind of catch?
Not usually. The only possible catch would be if the dealer wrote on the vehicle contract that the deposit contribution would be negated if the finance was cancelled, and that you would have to pay it back. However, that almost never happens, and it is fairly problematic for the dealer and manufacturer to enforce anyway. Simply, once the customer has driven off in their new car, any chance of getting more money out of them is going to be slim.
The manufacturers also know that the vast majority of customers will not cancel their agreements, so they are content to keep offering deposit contributions instead of discounts. If it becomes a much bigger issue then they may start to look for other alternatives.
The key thing to remember is that you have 14 days from the contract being activated to cancel the finance agreement. You need to do this in writing and you need to be very clear with the finance company.
If you don’t properly communicate your cancellation to the finance company (or if you forget…) and you go over the 14-day cancellation period, you will be subject to fees and charges when you try to cancel the agreement.
It’s also important to remember that cancelling your finance agreement doesn’t mean you can give the car back. It just means that you have to pay cash to cover the amount you borrowed to buy the car. So don’t think that this is a way to get out of your obligations after you have taken delivery of your vehicle. For more information on that, have a look at this article.
What if I’m financing elsewhere?
I know of a few customers who have juggled two finance deals to try and beat the system – signing up to the manufacturer finance offer to get the deposit contribution, then cancelling it and signing up to another lower-rate finance offer elsewhere to pay the manufacturer finance company back.
This is risky, because if there are any delays in getting your second finance plan set up and paid out, you will miss out on paying back the manufacturer finance company on time. Not really recommended unless you are very confident in what you are doing…