written by | November 2, 2022

What Does Down Payment Mean and How You Can Calculate It?

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A down payment is a money paid upfront in a financial transaction, such as purchasing a home or car. However, considering the expensive amount involved in the assets like houses or automobiles, gathering the finances for the same could be quite a burden-some for many buyers. These big-ticket and pricey assets can affect your liquidity and lock huge amounts in one asset. 

Did you know? As per RBI guidelines, lenders or banks should only provide 80% of property value as a loan if the asset is above ₹30 lakh. The buyer should finance the remaining 20% of the asset price as a down payment. 

What is Down Payment and Its Purpose?

Owning a house or car is a dream for many and a significant investment in one's life. The down payment comes to the rescue in this case. The down payment is the initial upfront amount the buyer pays the seller on purchasing expensive assets like a house or car. 

The purpose of a down payment is to turn home buyers' dreams into reality. With the down payment option, buyers can own their dream home or car much earlier than a one-time purchase. As the one-time purchase requires huge funds at a time which many buyers will not be able to afford, a down payment is the most sought-after option by many. There are also low down payment mortgages available to assist first-time homebuyers. Down payment is made at the earlier transaction stage and calculated on the property or automobile value. 

Usually, the down payment can range anywhere from 0% to 50% (rare), as there are also zero down payment car loans available nowadays for qualified borrowers. However, the standard down payment amount can be 20% of the asset value. Different down payment rates are available in the market, such as 3%, 5%, 10%, and 15%. The buyer can pay the remaining property price in full by availing of a loan or mortgage from a banking or financial institution. The borrower pays this borrowed home or car loan through EMIs over the loan tenure. 

Also read: Offers on Credit Card Bill Payments - Cashbacks, Rewards Points & More

How is the Down Payment Amount Decided?

With the down payment option, buyers can purchase expensive assets like a house or car and become the owner of the assets only with part-payment of the property value. Various lenders and financial institutions in the loan market offer house and car loans to assist buyers. 

The down payment is calculated on the asset price and can be paid by the buyer to the seller through various payment options such as cash, online banking, bank check, or credit card. Buyers can choose to pay a high or low down payment amount according to the availability of finances and negotiate it with their lender. 

However, various factors affect the down payment amount. These factors decide the percentage of the down payment to be applied to the asset value. Paying too high a down payment or too low a down payment are not desirable options, as a high payment can lead to a liquidity crisis. A down payment will make you pay more equated monthly instalments (EMIs) for many years to cover the total loan amount. 

Factors that affect down payment

  • Type of asset – house or car 
  • Value of the asset or property price 
  • The credit score of the borrower 
  • Guidelines for the loan transaction 
  • Type of the banking or financial institution 
  • The market value of an asset 
  • Buyer’s borrowing history 
  • Terms and conditions of the loan opted 
  • Other significant factors in each specific scenario 

How Is the Down Payment Calculated?

The Digital India initiative is transforming the way we handle money. From online payments, various trustable online payment apps, online loan apps, etc., the world is changing into a digital space. Paperless, transparent, secure, and quick are some of the highlights of digital India. As a result, buyers can now avail of loans online at their comfort and become home-owner right away. There are a bunch of online down payment calculators, loan amount calculators, EMI calculators, and more to calculate and ascertain various amounts easily. 

A down payment calculator is an ideal and quick way to calculate the down payment amount and the EMIs to be paid over the loan tenure. It is a utility tool which assists buyers in determining the down payment within seconds. Buyers can find online down payment calculators to ascertain amounts such as cash needed, processing fee, down payment, EMIs and more. 

Components of the Down Payment Calculator 

Numerous online down payment calculators are available to help buyers in calculating the down payment amount. The typical down payment calculator includes input spaces where you can enter the desired amount and automatically the results will appear as you change each variable. The typical down payment calculator includes these components or variables such as: 

  • Total Cost of Asset

 In this row, you should enter the property value you are planning to purchase or the price of the car. If the asset value is ₹25 lakh, enter this amount in this row. 

  • Loan Tenure

The loan period given by your lender should be entered here. You can change loan tenure to different years such as 5, 8, 10, 15, 20, 30, etc, and compare the results for informed decision-making. 

  • Interest Rate

The rate at which you have to pay EMIs over the loan tenure is entered here. If you availed of the loan at 9%, 15%, or 17%, give the particular percentage here. 

  • Down Payment

As negotiated with your lender, enter the down payment percentage here as 3%, 10%, 15%, or 20%. 

  • Processing Fee

 Your lender institution will charge some amount for providing the home or car loan known as a processing fee. This processing charge is applied to the amount of loan given to you, enter the processing fee percentage here. 

  • Other Variables

Some down calculators also include inputs for your credit score, location of the house, and other required criteria to assist you in ascertaining the significant amounts. 

Also read: What Is a Deferred Payment? Meaning, Example & How to Use Deferred Payment

How does Down Payment Calculator work? 

After entering your loan and down payment details into the down calculator, you will see the results within seconds. Various amounts will appear on your screen, such as the down payment, processing fee, loan amount, EMIs, and cash needed. When paying the down payment, you should also carry the processing fee with you for the payment of the full amount. The cash needed includes both a down payment and a processing fee. 

For example, Mr. X purchased a car worth ₹20,00,000 and made a down payment of 15% which is ₹20,00,000 * 15% = ₹3,00,000. 

The lender charged a processing fee of 2%, which is applied to ₹17,00,000 as the bank only provides the loan amount, excluding the down payment amount. 

So, the processing fee is ₹17,00,000 * 2% = ₹34,000. 

Total cash needed comes to ₹3,00,00 plus ₹34,000 = ₹3,34,000. 

The full down payment to be paid by the borrower equals ₹3,34,000. 

Let’s understand even more in-depth with two same scenarios but with two different down payment options. This includes situation 1 with a low down payment amount and situation 2 with a high down payment. 

Example: Ms A is planning to buy her dream house worth ₹40,00,000 on loan. The lender gave her the option to pay a down payment of 5% on the asset value. However, Ms A chose to make a 20% of upfront payment to make fewer monthly instalments. 

Situation 1: 

  • House value = ₹40,00,000
  • Down payment = 5% on asset price = ₹40,00,000 * 5% = ₹2,00,000 
  • Loan amount = ₹40,00,000 - ₹2,00,000 = ₹38,00,000 
  • Loan period = 20 years 
  • Interest rate = 7% 

Using the down payment calculator or loan amount calculator, monthly instalments or EMIs come to around ₹29,461.35 in situation 1. 

Situation 2: 

  • House value = ₹40,00,000
  • Down payment = 20% on asset price = ₹40,00,000 * 20% = ₹8,00,000
  • Loan amount = ₹40,00,000 - ₹8,00,000 = ₹32,00,000 
  • Loan period = 20 years 
  • Interest rate = 7% 

Monthly instalments or EMIs for scenario 2 come to approximately ₹24,809.56 using the loan amount or down calculator. 

By opting to the 20% down payment option, Ms. A saved ₹29,461.35 - ₹24,809.56 = ₹4651.79 or approx. ₹4652 per month. So, total savings are ₹55,824 per year and ₹11,16,480 in 20 years of the loan period. Going with scenario 2 is the best loan decision made by Ms A. 

Also read: Credit Card Bill Payment - What are Different Methods to Make Credit Card Bill Payment

Benefits of Making Higher Down Payment 

As seen from the above example of Ms A, making a higher down payment, not too high, can bring several benefits to the borrower. Buyers should examine the down payment percentage to be paid by considering available finances and credit score. Making a too-low or too-high down payment is not advisable. Here are some of the advantages of making a higher down payment: 

  • Payment of less interest amount 
  • Fewer monthly instalments or EMIs 
  • Faster re-payment of home or car loan 
  • Better loan interest rates by your lender 
  • Faster loan approval 
  • Increase in borrower’s credit funding the appropriate and balanced worthiness

Conclusion:

A down payment percentage is vital in any home or car loan transaction. This will help you make better decisions and free buyers from loan payments. With this blog, you will now be able to understand the concept of down payment along with the ability to use a down payment calculator easily. You can also avail of a down payment loan provided by some institutions in case of a shortage of funds. 
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FAQs

Q: What is a down payment calculator?

Ans:

The down payment calculator or down calculator is used for calculating the down payment amount. Numerous down payment calculators and loan calculators are available online for quick calculation.

Q: What are the benefits of making a higher down payment?

Ans:

The low down payment is not recommended as it does not have many benefits. Keeping a down payment at 20% or so can leave you with many advantages, such as 

  • Fewer EMIs 
  • Faster loan approval 
  • Better interest rates 
  • Less interest amount

Q: What components does a down calculator commonly include?

Ans:

A typical down payment calculator includes inputs such as total asset cost, loan tenure, down payment, interest rate and processing fee, and other variables.

Q: What is a down payment?

Ans:

An initial upfront amount paid by the buyer to the seller for purchasing an expensive property like a house or car is known as a down payment.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.