What is Down Payment?
The down payment is an initial payment for the purchase of an item on
credit. In simple terms, it is an advance payment for an expensive
purchase. The payment represents a percentage of the total purchase
price. You would pay the initial upfront payment called the down
payment for the purchase of a car or a house.
You would make the down payment out-of-pocket instead of borrowing the
amount. It is wise to make a down payment when availing of a loan even
if you don’t have to. You save on interest payments across the tenure
of the loan. It would be a good idea to make a down payment of 15%-20%
of the cost of an expensive asset such as a house when availing a home
loan. You may repay the remaining loan amount over time through EMIs
or equated monthly instalments.
Lenders may specify a minimum amount for the down payment. You could
make a small or large down payment depending on your affordability. If
you make a large down payment, you will be able to comfortably repay
the equated monthly instalments as you have to repay a lower amount of
loan.
Your loan would quickly be approved, and you would also save on the
loan processing fees. However, a large down payment would lock your
funds resulting in lower liquidity, and you would have to cut back on
spending. You could face a shortage of funds during a financial
emergency. You must decide on the down payment before approaching the
bank for a loan.
What is the Down Payment Calculator?
A down payment calculator is a utility tool that shows you the amount
of down payment you must make while availing of a loan. It also helps
you to calculate the EMIs on your loan.
The down payment calculator consists of a formula box, where you enter
the total cost of the asset, the percentage of the down payment, the
rate of interest on the loan, the processing fees, and the loan tenure
in years. The down payment calculator shows you the amount of down
payment and the loan EMI to repay the loan.
How does Down Payment Calculators work?
The down payment calculator will calculate the down payment you must
make before you take the loan. It will also display the loan EMIs on a
car loan or a home loan.
For example, you want to buy a house for Rs 50,00,000. You would make
a down payment of 20% or Rs 50,00,000 * 0.2 = Rs 10,00,000.
The bank would sanction the home loan of Rs 40,00,000. You have
processing fees of 1% of the loan amount or Rs 40,00,000 * 0.01 = Rs
40,000.
The total amount you need for the down payment is Rs 10,00,000 + Rs
40,000 = Rs 10,40,000.
Total down payment = Rs 10.4 lakh.
You must calculate EMIs on the home loan using the formula:
EMI amount = [P x R x (1+R)^N]/[(1+R)^N-1] where P, R, and N are the
variables.
This also means that the EMI value will change every time you change
any of the three variables.
‘P’ stands for the Principal Amount. It is the original loan amount
given to you by the bank on which the interest will be calculated. ‘R’
stands for the Rate of Interest set by the bank. N is the Number of
Years given to you for the repayment of the loan.
As home loan EMIs are paid each month, the duration is calculated in
the number of months. So, if you take a home loan of Rs 40 lakh with
an interest rate of 10% for 25 years the EMI will be:
P = Rs 40 lakh, R = 10/100/12 (You convert to months), N = 25 years or
300 months.
Home Loan EMI = [40,00,000 x 10/100/12 x (1+10/100/12)^300] /
[(1+10/100/12)^300-1]
Home Loan EMIs = Rs 36,348.
