What are down payments in loan EMI?

Down payment in loan EMI are the initial payments that the customer makes during a big purchase such as a vehicle, home, or real estate purchase. Down payment in loans, EMI can be made by credit cards, cash, cheque, or funds from personal loans.

The down payment amount varies based on the loan type and the borrower’s profile. Usually, the upfront payment covers 10% of the total cost of the product. 

The down payment is non-refundable. This payment gives security to the lending institution as the customer pays a portion of the purchase price upfront.

Advantages of a down payment in loan EMI’s:

There are certain advantages of making a down payment on a loan EMI on big purchases. Those advantages are listed below:

Lower monthly payments:

To lower the amount of the mortgage or loan that needs to be taken from the bank, paying a high down payment is advisable. Thus it lowers the monthly installment that is partial and principal interest on the loan.

Avoiding private mortgage insurance:

Certain lending institutions demand the customer provide a security or guarantee when the customer makes a low down payment on a loan EMI in case of default. Hence to provide insurance for the lender, the customer needs to obtain mortgage insurance.

More equity in the purchase:

How much ever the percentage of down payment is made by the customer, that much percentage of the purchase the customer owns. For better understanding, if a customer makes a down payment of 25%, the customer owns 25% of the purchase immediately. The other 75 % is owned by the lender.

Future borrowing capability:

Choosing a higher down payment on a loan EMI reflects the impression that the customer has a strong credit profile. This action ultimately helps in securing additional loans in the future.

Faster ownership:

Making a down payment in a loan EMI on the purchase provides ownership authority faster and easier within a minimum amount. Thus documentation of the purchase can be done quickly.

The disadvantage of a down payment in a loan EMI:

Everything comes with both advantages and disadvantages. The disadvantages of a down payment in loan EMI are mentioned below:

Financial stability:

Paying a higher down payment on a loan EMI might reduce the amount available for other expenses or financial requirements. When payments including down payment in loan EMI are not managed properly there is the risk of affecting and damaging the credit profile.

More time to save money:

Paying a higher down payment in loan EMI results in the depletion of savings. To recover from the depletion of savings might require more time than usual.

Factors affecting down payment in loan EMI:

There are certain factors that are interconnected when it comes to a down payment. Those factors are listed below:

• Credit score:

A credit score is an important factor when it comes to loan approval or down payment on a loan EMI. Making a down payment on a loan EMI is also a factor which reflected in credit scores.

• Income:

Income represents the customer’s repayment potential. It assists the lender in determining whether the customer is able to repay the debts on time or not.

• Resale value:

The down payment value is directly proportional to the resale value of the purchase. 

For example, if the customer’s purchase is a vehicle, then after a period of time the value of the purchase gets reduced. As such, if the customer defaults on their loan, the lender may not be able to recover all their dues. In this case, the lender might demand a higher down payment.

Also read:

What are the different types of loans in 2024?

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