Quick guide to car deposits

As a motor trader, you’re used to making great deals that benefit your business and your customers alike. But when it comes to car deposits, are you sure you fully understand all the pros and cons?
 
Of course, motor dealerships are hugely varied. You could be selling anything from second-hand run-arounds to brand new supercars. You might have a bricks-and-mortar showroom or forecourt, an online presence, or a hybrid of the two.
 
Whatever your business model, it’s always wise to decide in advance what your policy is around deposits, and get documents drawn up professionally.
 
In this article, we’ll take a look at some of the most common scenarios involving car deposits, including when they’re refundable, how to take payments, and how to protect cash deposits from theft by taking out appropriate motor trade insurance. Read on for our quick guide!
 

What do we mean by a deposit?

 
Now, this is one of those thorny problems that often leads to misunderstandings or even outright disagreements between motor traders and customers!
 
When garage owners talk about a deposit, they generally mean an upfront instalment of a car purchase, with the rest to come either when the customer picks up the car, or in monthly payments over a lengthy period. They consider the car sold at the point that the customer either signs a contract, makes a deposit, or both.
 
Some buyers, however, think of deposits as more like an expression of interest in purchasing a car, or a temporary holding payment to prevent the sale to another customer.
 
Why does this difference of opinion matter? Largely because of expectations around refunds. Read on!
 

Are deposits refundable?

 
In most purchases made in bricks-and-mortar showrooms, deposits are not refundable: the car is sold. If the customer chooses not to collect the car or make further payments, they lose their deposit.
 
From your point of view as a garage or showroom owner, this makes total business sense. Why else would you hold a car for a customer, when other buyers might be interested? You want your customers to prove they’re serious about going ahead with the purchase, and are not going to carry on looking elsewhere.
 
However, some customers are shocked to find their deposit is not refundable if they change their mind about buying the car, or find one they prefer in a different showroom.
 
If they haven’t completed and signed the contract to buy the car, customers might claim this means they haven’t actually committed to buying the vehicle and therefore want their money back. But it’s unlikely you have to comply, unless you explicitly agreed the deposit was refundable.
 

When are deposits refundable?

 
If you, as the car trader, cancel the order, then you will of course have to pay back the deposit to the customer. You might well choose to offer the customer in question an alternative vehicle, but they’re not obliged to take it.
 
There are several scenarios in which you might not be able to fulfil a customer’s order. For example, if it’s a new car, then the factory might not be able to supply the car, perhaps due to supply chain issues or changes in production.
 
If your showroom is part of a chain, then the car that has caught a customer’s eye might no longer be available. Another possibility is that a vehicle is damaged or stolen from your premises, so make sure you’re covered with motor trade insurance.
 
Customers can also claim back their entire payments, including their deposits, if the goods you supply are not what they ordered or are faulty.
 
If a customer is buying a car on finance (see below) and their application is declined, most dealerships refund the deposit even when not legally obliged to do so as they recognise that the customer simply cannot pay. It’s good practice, and will encourage customers to return to your showroom for a cheaper vehicle or when they’ve resolved their credit problems.
 
Likewise, you might choose to refund a deposit out of goodwill – but make sure that any costs you’ve incurred so far are covered. Customers often don’t realise what goes on behind the scenes of a dealership, so you might have to explain your approach.
 
Offering refundable deposits is also a viable sales tactic in certain circumstances: it can prompt customers to make a decision to buy a car, safe in the knowledge that they can back out if they change their minds. Once they have made this psychological commitment, chances are good that they will go ahead with the purchase.
 
To reduce the opportunity for conflict to arise, you should make it clear both verbally and in writing whether or not a deposit is refundable. Putting it in an email or noting it on a receipt should be sufficient proof.
 
Remember: disgruntled customers who feel you have misled them are likely to damage your reputation. In these days of social media and online reviews, it’s a significant risk.
 

What about online purchases?

 
Deposits are also refundable if the car is entirely purchased online, without any visit to your dealership. This is because all online purchases are subject to a 14-day cooling-off period with a few exceptions such as if an item is custom-made or personalised, or bought from a private individual rather than a business.
 
In fact, even after you have delivered the car and taken full payment, the customer can still change their mind and get a full refund. Certain terms and conditions do apply, though: for example, you can charge the customer for the cost of delivery, collection, and any damage caused while the vehicle was in their possession.
 
And if the purchase was made partly online, but partly in person – whether on or off your premises – then the cooling-off period does not apply.
 

Should I take car deposits?

 
Car deposits are standard throughout the industry, particularly for more expensive vehicles. So when might you choose not to take a deposit?
 
Some customers might ask to sign a contract to buy the vehicle without paying a deposit, and expect you to take it off the market at that point. But proceed with caution! While the contract should be legally binding if properly drawn up, you’d have to go through the courts to enforce it. It’s a huge hassle and considerable cost to chase a buyer who changes his or her mind in this way.
 
You might also insist that the customer pays the whole amount when they’re ready to sign the paperwork and drive the car away. However, this is only appropriate when selling used, cheaper vehicles. Few people are in a position to stump up cash outright for a pricey motor.
 
Some dealers also offer finance deals with no deposits – see below.
 

Buying a car outright

 
Your customers might choose to buy their vehicle outright, or through finance. Let’s take a look at how these different types of purchase affect deposits.
 
If buying outright from a bricks-and-mortar dealership, customers don’t need to make a deposit – they can simply pay the full amount, complete the paperwork, and drive the vehicle away.
 
They might, however, make a deposit to secure the vehicle until they’re ready to pick it up, for example if they’ve seen the car online. These customers will want to come to view the car and test drive it, so make sure you’ve got motor trade insurance to keep them covered.
 
You should set a time limit on such deposits, otherwise you could be left waiting for a long time.
 

Buying cars on finance

 
However, many customers, particularly those buying pricier new vehicles, will seek ways to finance them, in which case deposits are usually essential. Such buyers might choose to get a personal loan from a lender, but they’re likely to be open to deals that finance companies offer through your dealership.
 
Hire purchase (HP) is often chosen by customers who can’t pay high deposits: they usually need to put down only around 10% of the purchase price to secure the vehicle. Then they pay monthly instalments for an agreed time frame, after which they own the car.
 
You might also be able to arrange a personal contract purchase (PCP) for your customers. Whereas HP is effectively a loan for the full cost of the car, PCP is a loan for the difference between its brand new price and its predicted value at the end of the contract.
 
As with HP, a PCP has a low deposit of around 10%, then monthly payments for an agreed time frame. These are lower than for HP, but at the end of the term, the customer does not own the car. Instead, they can choose to return it to you, put the resale value towards the cost of buying a new car, or pay the resale value and keep it.
 
For both HP and PCP, the monthly instalments come with interest on top. So the more a customer can pay in a deposit, the lower the cost of the vehicle overall.
 
Another option is to lease a car, in which case maintenance and servicing is included in the monthly payment and the car never belongs to the customer. Deposits are usually three months’ rental fee.
 

No-deposit finance deals

 
With no-deposit finance deals, customers pay nothing upfront. They’re sometimes even combined with 0% APR interest deals, making them very attractive options for customers.
 
Of course, such deals tend only to be offered to prospective buyers with excellent credit scores. As these customers are low-risk borrowers, finance companies are happier to lend them larger sums of money.
 
Plus, no deposit isn’t quite what it seems. It tends to mean that the car manufacturer or the dealer is offering a deposit contribution that covers the entire sum – effectively, a discount.
 

Cooling-off periods for car finance deals

 
Just as with online purchases, there are also 14-day cooling-off periods for credit deals. Your customers can cancel the loan within this time for any reason, providing it is for less than £60,260.
 
However, their credit deal is usually separate from their sales agreement with you, the vendor. Depending on the terms and conditions of the contract, the customer might still need to find the money from somewhere or risk losing their deposit.
 
If you think the customer genuinely cannot pay, you could use your discretion and switch the deposit to a cheaper model. But you are probably not obliged to do so.
 

How do I take car deposits?

 
If you take a cash deposit – probably for a cheaper, used car – then you should store it carefully in a safe until you can pay it in at a bank. Make sure it’s covered under the terms of your motor trade insurance policy, too.
 
Under money laundering regulations, cash payments of more than £10,000 for an item are illegal.
 
Otherwise, card payments are most common. Credit cards offer the buyer more protection, but incur a fee for vendors. So if you choose to accept deposits by credit card payment, make sure you’ve factored this into your calculations.
 
Some buyers might want to pay by cheque – remember that these take a few days to clear, so don’t part with the goods until you’re confident you have the money. Banker’s drafts clear instantly, so these are a more reliable option.
 

Get a quote from Insurance Choice today

 
Working in the motor trade can be a complex business, so at Insurance Choice we want to make things simpler for you by arranging your motor trade insurance.
 
We have 20 years’ experience in tailoring policies to suit your business needs, whether you’re a major dealership or a part-time trader. We can offer flexible payment options, including paying in monthly instalments.
 
Motor trade insurance policies can include cover for road risk, to insure you and your staff to drive vehicles in connection with your business. Collection, delivery and test drives are also covered.
 
If you have any queries, just give our UK-based customer service team a call.
 
Get a quick quote today.

Policy benefits, features and discounts offered may very between insurance schemes or cover selected and are subject to underwriting criteria. Information contained within this article is accurate at the time of publishing but may be subject to change.