How Down Payments Affect Your Car Loan?
A car loan down payment is the upfront amount you pay from your savings towards the car's price, with the bank or NBFC financing the rest. A higher down payment lowers your loan amount, shortens your tenure, and can improve your chances of a lower interest rate. You can pay it by cash, cheque, demand draft or online transfer.
Most banks and NBFCs in India expect a car loan down payment of around 10% to 25% of the car's price, though the exact share depends on the lender's policy and your credit profile.
Zero down payment car loans are usually reserved for borrowers with a strong credit score and stable income, since the lender takes on more risk when it funds the entire price of the car.
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.
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.
- 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 in 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. 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:
- 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.
- 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 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.
To build your down payment faster, set a fixed savings target, use a separate savings account for it, and trim discretionary spending in the months before you plan to buy your car.
Summary
A car loan down payment is the upfront amount you pay towards your car's price, with the bank or NBFC financing the rest. Paying more upfront lowers your loan amount, EMI and interest cost, and can improve your chances of loan approval and a better interest rate. Use BankBazaar's car loan EMI calculator to see how different down payment amounts affect your car loan before you apply.
FAQs on How Down Payments Affect Your Car Loan
1.What is a down payment on a car loan?
A down payment on a car loan is the upfront amount you pay from your own savings towards the car's price, while the bank or NBFC finances the remaining balance. It can be paid in cash, cheque, demand draft or through an electronic transfer. Making this payment reduces how much you need to borrow for your car loan.
2.How much down payment do I need for a car loan?
Most lenders expect a car loan down payment of around 10% to 25% of the car's price, though the exact amount depends on the lender's policy and your credit profile. A higher down payment usually means a smaller loan amount. You can confirm the exact requirement with your chosen bank or NBFC.
3.What is a zero down payment car loan?
A zero down payment car loan lets you finance the entire price of the car without paying any amount upfront. These loans are usually offered to borrowers with a strong credit score and stable income, since the lender takes on greater risk. Even when this option is available, paying some amount upfront can still work in your favour.
4.How does a down payment affect my car loan amount?
A down payment directly reduces the loan amount you need to borrow, since it covers part of the car's price upfront. The more you pay as a down payment, the smaller your car loan will be. This makes the loan easier to repay over its tenure.
5.Does a higher down payment reduce my car loan EMI?
Yes, a higher down payment lowers your car loan amount, which in turn reduces your monthly EMI. A smaller loan also means you pay less interest over the loan tenure. This makes monthly repayments easier to manage.
6.How does a down payment affect my car loan tenure?
A larger down payment reduces your car loan amount, which can help you repay the loan sooner if you keep your EMI the same. Alternatively, you could use the savings from a smaller loan to buy a higher-priced car while keeping the same EMI and tenure. The impact depends on how you choose to structure your repayment.
7.Does a down payment affect the interest rate on a car loan?
Yes, a larger down payment can improve your chances of securing a lower interest rate on your car loan, since it lowers the lender's risk. Borrowing a smaller amount can also make loan approval easier, especially if your credit score isn't strong. The exact interest rate offered still depends on the lender's own policies.
8.Can I get a car loan with a modest credit score if I pay a higher down payment?
Paying a larger down payment can improve your chances of car loan approval even with a modest credit score, since it lowers the amount the lender needs to finance. This reduces the lender's risk and can partly offset a weaker credit profile. However, approval still depends on the lender's overall eligibility criteria.
9.What payment methods can I use for a car loan down payment?
You can pay your car loan down payment using cash, cheque, demand draft or electronic payment methods, depending on what the dealership accepts. The lender then finances the remaining balance of the car's price. Confirm the accepted payment modes with your dealer before purchase.
10.How can I save for a car loan down payment?
You can save for a car loan down payment by setting a fixed savings target, using a separate savings account, and cutting discretionary expenses in the months before your purchase. Planning ahead makes it easier to arrange a meaningful down payment without straining your finances. This can also help you get better loan terms once you apply.
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