What is a down payment and how it is calculated

Posted On: 21-july-2022


What is a down payment? 

Down payment is the initial payment that you make when you purchase something that's a little expensive. It isn't the whole amount of the price of the product but only a portion of the entire price that you pay as a down payment. It can be the purchase of an automobile, a property, or an expensive gadget. This payment can be made in cash or by card or by internet banking.

If your initial deposit is higher then you have to pay lesser interest or monthly installments on the amount borrowed. 

Now how to decide what or how much will be the initial payment. It depends on various factors such as asset type, the value of the product, loan form, and borrower and lender too. 

Buying something expensive like a car or a house can be burdensome on your finances. Also saving funds for these purchases will consume a lot of time. To save you from these situations there's an option of down-payment. With down-payment, you pay only a portion of the entire amount during your initial purchase which turns out to be easy for everybody. With it, your lender too offers you an interest rate that's lower which is charged when you pay the remainder. 

On average the initial deposit for assets like a car or real estate ranges from 3% to 20% depending on the type, price, and loan form. This helps you make flexible payments. The more your initial deposit the lesser will be your loan interest rate. Knowing that the borrower is less risky gives lenders a sense of security. However, financial institutions often seek collateral to secure the mortgage or loan against default to recover the loan amount. 

When you buy a house on EMI your initial payment rate varies depending on the number of times you've purchased property. It is lesser for first-time buyers and more for the ones that are repeating. 

How to calculate a down payment?

The interest rate of any mortgage loan is directly proportional to the initial deposit that the buyer makes. You'll find different EMI calculators online to figure out how much you have to pay in monthly installments. Look at this example of a business loan down payment calculator by ESWARI GROUP to better understand the calculation. 

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 the variables.

P = Principal Value

R = Rate of Interest 

N = Number of years allotted to you for repayment 

This is the formula you could use to find out the down-payment.