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What is a Down Payment: Here is what you need to know

Updated on: 25 Apr 2024

Down payment—it is a term that appears a lot when you’re about to buy a big-ticket item. It comes into play when you plan to become a homeowner or car owner and sometimes even when you buy home electronics on EMI.

Knowing the meaning of the down payment in-depth and how financial companies calculate it can help you plan your finances better.

What is a Down Payment?

If you cannot afford to purchase what you want outright it is easy to get financing for it. In such cases, financial companies require you to contribute to the cost of the product, which is not financed by a loan. This amount is nothing but the down payment. Check out its brief overview:

Lending institutions require you to pay for a part of the total price to reduce the risk of default.
The minimum payment for such loans ranges between 5-20% of the total purchase price.
The financial institution covers the balance amount, which you must repay in monthly instalments and the interest.
Certain loans also come with a zero down payment facility, which means you don’t have to pay any upfront cost.

Guide To Minimum Amount Need For a Down Payment

Lenders review various aspects when determining the minimum payment you need to make to get a loan. However, the following are the two major factors that influence the

Loan Type & Value

The down payment amount varies based on what you are financing and its value.

A home loan usually requires a higher amount as an upfront cost
A car loan usually requires a lower amount

Credit Score

Financial institutions consider your credit score to assess your experience and attitude with regard to credit.

With a good record of timely and responsible repayment, you can reduce the requirement of the initial payment amount.
With a strong profile, you can finance your big-ticket purchase with an upfront payment of as low as 5% of the total price

Why To Make a Large Down Payment?

While making the minimum down payment may seem attractive, try to pay the highest amount as per your affordability for the following reasons:

Better Chances Approval: Lenders view you as a less risky borrower if you pay a larger amount when purchasing an expensive item, improving your chances of getting approval
Lower Monthly Instalments: Paying more upfront also reduces the amount of EMI, reducing the burden of repayments significantly
Cost Savings: With a reduced loan amount, you end up paying a lesser amount as interest charges
Faster Ownership: Paying more than the minimum also ensures that you can more quickly become the full owner of the product you purchase

There is no one-size-fits-all approach regarding down payment, and it depends on the financial company and what you plan to buy. Ideally, you must try to pay a higher amount to keep interest charges low and make your monthly instalments more affordable.

However, if you don’t have the funds to make this payment, Fibe has got you covered. Our Instant Personal Loan offers up to ₹5 lakhs without the hassle of making a down payment. Download our Personal Loan App or log in to our website to enjoy quick funding with minimal paperwork.

FAQs on Down Payment

Can I get a personal loan to make the down payment?

Yes, you can opt for a personal loan to pay the initial amount for a larger loan amount, such as a home loan.

Can I use credit as a down payment?

Yes, you can get a loan to finance the initial payment for another loan.

What is an example of a down payment?

Check this example:

Suppose you get a loan to purchase a car worth ₹10 lakhs. The lender may require you to pay a certain amount to get financing for the rest of the car’s cost. If the minimum payment that the lender requires you to make is 5%, you will have to pay at least ₹50,000