Decoding Loans: Tips on your down payment

Thu Apr 5, 2012 2:38pm IST

1 of 2. A man uses an electronic machine to check an Indian currency note at a money exchange shop in Siliguri February 5, 2008.

Credit: Reuters/Rupak De Chowdhuri/Files

Related Topics

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don't have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the down payment, when the time is right.

Down payment generally amounts to 10-20% of the total cost of the home, as banks generally fund only about 80- 85% of the loan amount. This is to make sure the buyer has some stake in maintaining the property. Also, this ensures that the loan amount lent by the bank is always lower than the market value of the house.

(For more stories, you can also visit www.bankbazaar.com)

AGE OF THE BUILDING

Another factor banks consider while determining the total amount to lend, is the age of the building. Depending on the age of the building the down payment is likely to increase, the older the more down payment, you may need to shell out. The bank always decides the home loan eligibility based on the property first.

This means if the building is old and the down payment chunk is huge, banks will still insist on the down payment, even if your income can easily qualify for larger loan amount. Banks adhere to such measures to safeguard their interests and to help them indulge in safe lending operations.

DOWN PAYMENT

Try and pay the down payment from your own money, savings or by liquidating some assets. Opting for a personal loan can be a costly affair, as interest rates are very high. If you don't have enough savings or assets to pay up the money, then its wise to wait and build assets and savings that can come handy for the down payment, when the time is right.

The concept of a down payment exists due the following reasons:

a. It indicates borrower's credit worthiness due to access to the down payment

b. The amount of real investment a borrower has in their purchase, and their fidelity in continuing to make payments regularly are linked

c. It acts as a sort of insurance for lenders, since borrowers know that if they default on their loan; they will not only lose the property but their down payment as well

d. It ensures that the buyer (borrower) has some stake in maintaining the property

e. It ensures that banks are protected from fall in interest rates since the amount that they lend is lower than the market value of the house. Therefore, if there is a fall, they can still recover the losses

DISCLAIMER

BankBazaar.com is an online marketplace where you can instantly get the lowest loan rates, compare and apply online for your personal loan (click here), home loan (click here), car loan (click here), credit card (click here) from India's leading banks and NBFCs.

FILED UNDER:

Economic Pulse

REUTERS SHOWCASE

Nifty Above 8,600

Nifty Above 8,600

Nifty hits record high above 8,600; state-run lenders gain  Full Article 

Bhopal Tragedy

Bhopal Tragedy

Bhopal's toxic legacy lives on, 30 years after industrial disaster  Full Article 

Essar Group

Essar Group

Exclusive - Essar's planned oil-for-steel deal tests Iran sanctions  Full Article 

Islamic Fund

Islamic Fund

India gets new Islamic equity fund but debt market still off-limits  Full Article 

Fiscal Deficit

Fiscal Deficit

April-October fiscal deficit nears 90 pct of full-year target  Full Article 

Oil Prices

Oil Prices

Oil hits new four-year low post OPEC as glut looms  Full Article 

Gold Imports

Gold Imports

Nov gold imports seen climbing on expectation of curbs   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage