Abhinav approached a couple of lenders to procure a car loan. His mind raced through many thoughts—whether he should buy a new car or a second-hand car that is financed by a second-hand car loan, whether he should make a big down payment or just a token amount, what would be the ideal loan tenure, and so on.
Numerous questions like these can be resolved if Abhinav decides on the quantum of the down payment. The bigger the down payment, the greater the flexibility that he can enjoy regarding the loan tenure, interest rates, and the choice of the car. Let’s understand how a big down payment can have a positive impact.
What is a Down Payment?
A down payment is a sum you pay upfront while procuring a loan. In other words, it is your contribution to finance the car purchase. The quantum of down payment varies from lender to lender; some lenders do not demand a down payment. Yet, from a long-term perspective, making a down payment is in your interest. As such, there is no prohibition if you wish to make a big down payment.
Reduction in EMI and Loan Tenure
The most tangible advantages of making a big down payment are the possible reduction in EMI amount and the loan tenure. This reduction eases your future financial liabilities.
Let’s assume Abhinav wants to buy a second-hand SUV for Rs. 5,00,000. The used car loan interest rate is 10%, and he can repay it over 36 months. The EMI works out to Rs. 16,134. Assuming Abhinav makes a down payment of Rs. 2,00,000, the EMI reduces to Rs. 9,680 with the same interest rate and tenure.
Now, he can choose to pay a lower EMI over the loan’s tenure, which ensures that he has more cash in hand.
He can even reduce the tenure of the used car loan by keeping the same EMI. In the above example, if he pays an EMI of Rs. 16,134 monthly, the loan tenure reduces to approximately 28 months rather than 36 months.
Ability to Purchase a Better Vehicle
With a bigger down payment, Abhinav can choose to purchase a bigger vehicle. Continuing the above example, he can buy a brand new or better second-hand car for Rs. 7,00,000. A down payment of Rs may fund the purchase cost. 2,00,000 and a loan of Rs. 5,00,000. Thus, the EMI remains the same at Rs. 16,134.
Eligibility for Incentives
Many vehicle financiers offer incentives like a longer warranty for accessories, lower used car loan interest rates, and so on, where the borrower makes a substantial down payment. You can make use of such incentives by creating a bigger down payment.
The Unseen Advantages
A larger down payment leads to a reduced EMI or a lower loan tenure, which, in turn, guarantees financial freedom once your loan is settled. You can then use your monthly income at your discretion. Further, if you need to take out any other loan in the future, say a home loan, there is more room for payment of EMIs for the home loan.
The lender is assured that the risk of default is not very high. Besides, making a huge down payment improves your credit score. It also helps you to negotiate for a lower interest rate.
Having understood how a big down payment can positively impact the EMI, tenure, interest rates, and the choice of a better vehicle, Abhinav could now make wise decisions. He can make financial calculations with the help of a used car loan EMI calculator to determine the used car loan eligibility and the EMI for different tenures and interest rates.
