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how down payment affects your car loan

how down payment affects your car loan

the amount of down payment plays a significant role when you're planning to finance your new car through a car loan. read more below to understand the impact.
February 14, 2021
6 min read
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how down payment affects your car loan

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there are multiple ways to finance your new car ranging from buying through your savings to availing of a car loan. if you're planning to secure a car loan to finance your new car, you need to understand how one of the major factors can affect it significantly.

the critical factor that affects your car loan eligibility calculator and your probable emi value of the car loan before you calculate emi using a car loan calculator is the down payment.

what is a down payment?

a down payment is the upfront cash that you pay to the car dealer immediately after buying the car. the down payment is paid through your savings.

however, a down payment does not necessarily have to be a cash payment; you can opt for alternative payment methods like cheque, draft, or electronic transfer.

how does down payment affect your car loan?

  • the down payment inversely affects your car loan. it means the larger the down payment, the smaller will be the value of your car loan. paying the maximum amount of your car price as a down payment will help you repay the car loan faster and easier.
  • the down payment also affects the loan tenure. if you can pay a large sum of the car price as a down payment, the shorter will be the loan tenure. you can also calculate the emi for the loan amount you want to secure from the bank or nbfc using the car loan emi calculator. a shorter loan duration also enables you to repay the loan quickly and clear off all your debts.
  • if you can repay the loan amount before time, you will save on the interest rates for a few months, as the loan period decreases.
  • down payment also affects the interest rate charged by banks, apart from the loan amount and tenure. as down payment reduces the loan tenure, the rate of interest charged decreases as it is calculated based on the loan period.

many banks and nbfcs believe the probability of the loan getting sanctioned is higher; if the customer pays off a large part of the car price, it reduces the risk of defaulting on the loan.

certain benefits come along with the down payment. often, the dealers might agree to a lower rate of interest and offer certain incentives through a special financing program. however, you need to read the fine print to understand the down payment terms thoroughly.

also, paying a down payment helps you offset vehicle depreciation as the value tends to depreciate at a rate of 15% every year; however, new vehicles lose their value at a rate of 25% in the first year.


making a down payment for your new car will help you manage your finances well and increase the probability of securing a car loan. some manufacturers offer zero down payment offers; however, it is advisable to pay the cash up-front to the best of your capabilities and reap long term net saving benefits.