There are multiple banks and Non-Banking Financial Companies (NBFC) in India that offer car loans to help customers buy their dream cars even when they don’t have enough funds for it. However, if you make a down payment while purchasing a car, you will only have to borrow a loan amounting to the balance price of the car. This will help you repay your loan quickly while saving on the interest that you pay to the lender. If you choose not to make any payment, the lender will have to loan you 100% of the price of the car. Many banks and NBFCs don’t even allow a 100% car loan since the risk associated with such a loan is more. Therefore, understanding the benefits of making a down payment during your car purchase will help you choose a make and model that will be best suited for your needs, and make an informed decision regarding the same.
The upfront cash that is paid while purchasing an item is known as down payment. This money is paid by the customer using his or her savings. When opting for a car loan, the customer can directly pay part of the total price of the car while the rest of the money will be paid by the bank or NBFC. This payment need not be made just using cash. A customer can also make a payment using a cheque, demand draft, electronic payments etc. depending on the retailer.
When an item carries an offer for ‘zero down payment’, it means that the customer does not need to pay any upfront cash in order to purchase the item. However, it is a good idea to still do so since paying cash upfront carries numerous benefits.
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).
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:
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.
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.