When buying a car, many people choose financing options like car loans to ease the financial burden. However, a crucial aspect that significantly shapes the conditions of your car loan is the initial down payment.
The act of making a down payment directly influences both the loan amount and the interest rates provided by lenders. Having a clear understanding of how down payments impact car loans and interest rates can enable you to make informed choices, ultimately saving money over time.
This article will delve into the complexities of down payments and analyse their effects on used car loans, empowering you to navigate the used car purchasing process confidently.
What is a Down Payment?
A down payment is the initial payment made when buying a car or another big purchase. Normally, it’s around 20% of the total price, but it can be more if you can manage it. Paying more at the start means borrowing less and having a smaller loan with less interest.
This payment shows you’re serious about buying and lowers the risk for the lender, which can help you get better loan terms.
Some people wonder about buying a car with zero down payment, but that’s not very common in India. For the most up-to-date details about zero down payment choices, your best bet is to explore the used car loan options available through CARS24.
Benefits of Making a Down Payment on Used Cars
Below is the curated list of the benefits of making a down payment on used cars:
1. Less Monthly Payment: A down payment is a portion of your total purchase price. So, as much as you clear, the rest impacts positively on your used car loan interest rate.
2. More Equity Share: Equity in auto finance is the gap between your loan balance and the sale price of the car. A larger amount boosts equity and reduces financial burden.
Cars depreciate over time, and as the value decreases you are more likely to go upside down on your loan when owing more than the car’s value. A larger down payment minimizes the chance of being stuck with a loan surpassing the car’s market value.
3. Lesser Interest to pay: A significant down payment on a used car loan offers benefits. By reducing the amount you borrow, you are not only reducing the monthly interest payment but also minimizing the interest paid over the loan term.
4. Possibly Reduced Rates: A larger down payment on the used car loans may impose a lower risk for your lender, while he could be willing to give you loans at lower interest rates. Plus, factors like, your credit score, and annual income play pivotal roles.
5. Better Acceptance Rates: According to data, there is about 14.2% rejection rate at car loan applications, so if you make a sizable down payment, the chances of your approval become high.
Impact of Down Payment on Car Loan and Car Loan Interest Rates
A down payment can have an impact on both the loan amount and the interest rates associated with the car loan. Here’s a breakdown:
- On The Loan Amount: When you make a down payment on a car, you are covering a portion of the car’s purchase price upfront. The remaining amount is to be financed with a car loan. A larger down payment reduces the loan amount which lowers your monthly payments and shortens the loan term.
- The Loan-to-Value ratio (LTV): The down payment affects the loan-to-value ratio positively. Lenders consider a lower LTV ratio as less risky, and it indicates that you have more equity in the vehicle. This can lead to more favourable loan terms, including potentially lower interest rates.
- Interest rates: Down payments can influence the interest rates also. Lenders determine the interest rate and a larger down payment can demonstrate financial responsibility and commitment to the loan, which may improve your chances of qualifying for a lower interest rate.
In summary, a sizable down payment not only reduces the loan amount and monthly payments but can also positively influence the loan-to-value ratio and enhance your eligibility for a more favourable interest rate. Let’s understand this with an example:
Example: Buying a Car of 20 Lakh in Value with a Down Payment of 4 lakh
Suppose, you make a down payment of ₹4,00,000 for buying a car of ₹20 Lakh in value and finance the remaining is ₹16,00,000 through the car loan. The lender, considering your down payment can offer you an interest rate of 8% per annum for the loan term of 5 years i.e., 60 months.
As per the used car loan EMI calculator, your monthly loan EMI would be approximately ₹32,442. By this loan term, you will pay a total of ₹19,46,534, including the interest.
A larger down payment secures a lower interest rate. This resulted in lower monthly instalments and a significantly reduced total repayment amount over the loan term.
Also read: Why Should You Have A Vehicle At Home
Who is eligible for a down payment Car Loan in India?
The eligibility criteria differ from bank to bank, but here we are trying to present a general idea about the common terms:
1. Income: You should ensure that your net annual income is more than your car loan amount. Here, your annual income plays a pivotal role.
2. Credit Score: A good credit score (it can be your CIBIL score) helps you in this case.
3. Value of The Car: The lower value of the car increases the chance of your getting a 100% loan.
4. Employed or Business Years: The years of experience in your job, profession or business increases the chances of your loan.
5. Relationship with The Bank: If you are an existing customer of the bank and maintain trust, your chances are high in getting a used car loan.
Conclusion
Down payments matter when it comes to car loans. Putting money down doesn’t just shrink your loan, it can also help you snag better interest rates and loan deals. When you show you’re serious by paying more upfront, lenders feel safer and might offer you a lower interest rate.
Plus, making a down payment means owning a bit of your car right from the start, giving you more options and chances to save.