What is Down Payment?
The down payment is an initial payment for the purchase of an item oncredit. In simple terms, it is an advance payment for an expensivepurchase. The payment represents a percentage of the total purchaseprice. You would pay the initial upfront payment called the downpayment for the purchase of a car or a house.
You would make the down payment out-of-pocket instead of borrowing theamount. It is wise to make a down payment when availing of a loan evenif you don’t have to. You save on interest payments across the tenureof 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 homeloan. You may repay the remaining loan amount over time through EMIsor equated monthly instalments.
Lenders may specify a minimum amount for the down payment. You couldmake a small or large down payment depending on your affordability. Ifyou make a large down payment, you will be able to comfortably repaythe equated monthly instalments as you have to repay a lower amount ofloan.
Your loan would quickly be approved, and you would also save on theloan processing fees. However, a large down payment would lock yourfunds resulting in lower liquidity, and you would have to cut back onspending. You could face a shortage of funds during a financialemergency. You must decide on the down payment before approaching thebank for a loan.
What is the Down Payment Calculator?
A down payment calculator is a utility tool that shows you the amountof down payment you must make while availing of a loan. It also helpsyou to calculate the EMIs on your loan.
The down payment calculator consists of a formula box, where you enterthe total cost of the asset, the percentage of the down payment, therate of interest on the loan, the processing fees, and the loan tenurein years. The down payment calculator shows you the amount of downpayment and the loan EMI to repay the loan.
How does Down Payment Calculators work?
The down payment calculator will calculate the down payment you mustmake before you take the loan. It will also display the loan EMIs on acar loan or a home loan.
For example, you want to buy a house for Rs 50,00,000. You would makea 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 haveprocessing fees of 1% of the loan amount or Rs 40,00,000 * 0.01 = Rs40,000.
The total amount you need for the down payment is Rs 10,00,000 + Rs40,000 = 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 thevariables.
This also means that the EMI value will change every time you changeany of the three variables.
‘P’ stands for the Principal Amount. It is the original loan amountgiven 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 ofYears given to you for the repayment of the loan.
As home loan EMIs are paid each month, the duration is calculated inthe number of months. So, if you take a home loan of Rs 40 lakh withan 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 or300 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.
