How Down Payments Affect Your Car Loan?

1. Check Your Car Loan Monthly EMI After Down Payment

Effect of Down Payment on a Car Loan

Down payments are inversely proportional to car loans. Since part of the total cost of a car is paid upfront, the more down payment you make, the less loan you will have to borrow in order to match the price of the car. This will, in turn, help you repay your loan faster. In addition to this, a smaller amount of loan also means that you will have to pay less money as monthly installments. Therefore, making a payment upfront while purchasing a car makes taking a loan easier on the pocket.

For example, a person plans on purchasing a car worth Rs.3 lakh and chooses a loan tenure of 5 years. If he or she makes a down payment of Rs.80,000 then he/she has to avail a car loan of Rs.2.2 lakh which should be paid back within 5 years along with the interest. However, if the individual decides to pay Rs.1.5 lakh upfront, he or she will only have to repay a loan amount of Rs.1.5 lakh excluding the interest. When this loan is paid in 5 years, it will significantly reduce the sum that the applicant will have to pay as equated monthly installments (EMI).

Effect of Down Payment In Terms of Loan Tenure

When securing a loan, the tenure of the loan repayment plays an important role on the EMIs paid by the candidate. If you avail a loan that is more spread out over the years, you will have to pay less EMI every month in order to repay the loan. If a large sum is paid off as down payment, you will need a smaller loan amount to meet the total price of the car you plan to purchase. Therefore, this will increase your repayment capability and you will be able to clear off your debt earlier. When the loan is repaid sooner, the money that you will need to pay as interest to your financing bank or NBFC will also reduce.

On the other hand, if you pay a large sum upfront and are still willing to pay the same EMI for the same loan tenure, you will have more funds available as compared to when you don't make a payment. This way, you will be able to purchase a car of a higher price. By choosing to pay with upfront cash, you would no longer have to settle for a car with a lower price tag anymore. Instead, you can now buy the make and model of the car that you have always dreamed of.

This can be further explained using the following examples:

1. Example 1 - Let us assume that a candidate wants to buy a car priced at Rs.3 lakh. Now, if the individual doesn't make any down payment, he or she will be able to repay the debt in 5 years considering his/her maximum repayment capability. However, if he/she decides to pay Rs.1 lakh with upfront cash, the loan tenure will come down to 3 years if assumed that the person is willing to pay the same amount as EMI.
2. Example 2 - Similar to the previous example, a person plans to buy a car without any down payment. Let us assume that he or she is eligible for a car loan of Rs.3 lakh considering the maximum repayment capability of the candidate is Rs.5,000 for the maximum loan tenure available. In such case, the candidate can purchase a car worth a maximum of Rs.3 lakh. However, if the individual decides to pay Rs.1 lakh upfront and is still willing to pay Rs.5,000 as EMI for the same loan tenure, he or she will still receive Rs.3 lakh as loan. But, in this scenario, the person can buy a car worth a maximum of Rs.4 lakh.

How Down Payments Affect the Interest Rate

In addition to the loan amount and loan tenure, making a down payment also affects the interest that you pay for your car loan. According to many banks and NBFCs, the chances of getting a loan approved increases tremendously if a candidate pays a large percentage of the total price of the selected car with upfront cash since the associated risk will be less. When you avail a loan of a higher amount, the chances of defaulting increases. Therefore, banks are likely to reject a loan if you don't make a zero or less payment upfront. Paying a large percentage of the total price is also helpful when you don't have a good credit score. This way, the loan amount will be less and the lender can be assured of your repayment capabilities.

Making a down payment reduces the term of a loan. Since the interest rate is compounded throughout the entire loan tenure, the reduction in the term requires less amount to be paid as interest. Additionally, when you borrow a smaller amount through car loan, you might be eligible for a lower interest rate. Therefore, a customer can save more if he or she makes a bigger down payment irrespective of the term of the loan.

Conclusion

Making a down payment while purchasing a car not only helps you borrow a smaller loan and pay the debt in a shorter period of time, but also impacts the rate of interest of your car loan. While some manufacturers provide a 'zero down payment' offer, it is still a good idea to pay with upfront cash to the best of your capability in order to enjoy long term benefits such as high net savings.

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