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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.
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.
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.
The ClearTax Down Payment Calculator calculates the down payment you must make before availing a loan. It also calculates the loan EMIs to repay the entire loan amount. To use the ClearTax Down Payment Calculator:
The ClearTax Down Payment Calculator shows you the down payment amount you can make before you avail of the loan. It also offers the EMIs on your loan. You can adjust the down payment to increase or decrease the quantum of the loan.
If you avail a big-ticket loan such as a home loan, you may calculate the home loan EMIs using the ClearTax Down Payment Calculator. If you make a large down payment, the loan amount reduces and you can easily handle the loan EMIs.
If you enter the percentage of the down payment on the asset, the ClearTax Down Payment Calculator will show you the amount of down payment before you avail the loan. You can decide if you want to make a large or small down payment before taking the loan.
Both of them have their share of advantages and disadvantages. You must choose the down payment amount depending on your financial situation. If you make a large amount of down payment, you save on the interest amount across the tenure of the loan. However, you may struggle for finances in a financial emergency.
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