The impact of down payment on two-wheeler loan eligibility

Obtaining a two-wheeler loan to finance your motorcycle purchase generally requires you to pay a down payment. Depending on the financial institution you approach, this down payment ranges from 10% to 30%. 

Although this appears to be a relatively small percentage of the overall price of your motorcycle, the down payment has a significant impact on your loan approval criteria. Besides, the amount you decide to pay as your down payment also determines your interest rate and EMIs.

In this article, we are going to explore how a down payment impacts your loan eligibility for a two-wheeler.

What is a down payment?

When you purchase a motorcycle or scooter through bank financing, you need to shell out an upfront amount to the dealer. This amount that you pay to the dealer during the early stage of purchasing your two-wheeler is referred to as the down payment. Remember, a down payment is necessary only when you use a bank loan to finance your purchase. If you pay the full amount without taking any loan, you don’t need to make any separate down payment. 

Therefore, the down payment is a part of the overall purchase price. Banks don’t finance 100% of the price of any asset, like your motorcycle. While they fund around 70% to 90% of the value, you need to pay the rest instantly. This is the down payment for your two-wheeler loan.

How does a down payment affect your loan eligibility?

When you make a larger down payment, you would be borrowing a lower amount from your bank to finance your two-wheeler. This can help you qualify for loans faster even if you don’t have a good credit score. Also, a higher down payment translates to lower monthly repayments. This is because, you need to take a smaller loan from your bank or NBFC when you make a large upfront payment.

Now, most banks expect a down payment of at least 20% as the standard loan approval criteria. Paying this amount exposes the bank or NBFC to a lower risk. 

Most banks and NBFCs would scrutinize your credit profile by checking your credit score before processing loans. In case you have red marks on your credit report or your creditworthiness doesn’t look too good, banks might be reluctant to grant your two-wheeler loans. 

In these circumstances, paying a larger down payment can reduce your risk profile and convince financial institutions to process the loans. Depending on your credit report, you may have to pay around 30% to 50% of the purchase price as your down payment.

Impact of down payment on your two-wheeler loan

Apart from affecting your loan eligibility, your down payment also influences your loan tenure, interest rates, and EMI.

1. Loan tenure

If you decide to pay just 10% of the motorcycle cost as a down payment, your bank would be financing 90%. On the other hand, if you pay a larger part, suppose 40% as your down payment, your borrowing would be much lower. With a smaller amount to repay to your bank, you can shorten your loan tenure and close it off sooner.

      2. Interest rate

 Paying a larger down payment for your two-wheeler loan can make you eligible for a lower interest rate. This is because, banks and NBFCs recognize your financial responsibility. As a token of appreciation, they charge marginally lower interest rates. This can translate to significant savings when you take a sizable loan to purchase your two-wheeler.

On the other hand, longer loan tenures attract high interest rates. On making a large down payment, you can shorten your loan tenure. This also implies that you would be paying a lower interest rate compared to what you would be paying for a longer tenure.

      3. Lower EMIs

 Most importantly, paying a sizable down payment reduces your loan burden. If you have funds at your disposal, it’s logical to make a larger down payment. Your bank or NBFC would be financing the remaining amount, which would be much lower once you make a large upfront payment. In the process, you would have a small cash outflow each month throughout the tenure of the loan. This would help you keep your expenses manageable.

Fulfilling your loan approval criteria

Now that you know the impact of your down payment on your loan eligibility, how would you fulfil your criteria to obtain loans?

This largely depends on the loan approval criteria set by your bank or NBFC. These financial institutions expect responsible borrowers to have a credit score of at least 750. If your credit score looks decent, you can be eligible for up to 90% financing. In these situations, you need to pay only a small down payment. Some NBFCs even sanction 100% of the two-wheeler loan. 

However, what if your credit score is poor and dips below 600? It would be tough to qualify for a two-wheeler loan from banks or NBFCs. In these situations, try to make a larger down payment, around 30% to 40% to fulfil your loan eligibility criteria. This way, you might qualify for a loan to purchase your two-wheeler.

Take Away

Before winding up, let’s understand the concept of down payment with relation to your loan. The loan amount you obtain and your down payment are inversely proportional to each other. Therefore, the lower the down payment you make, the higher would be the loan you need.

Accordingly, a lower down payment implies larger EMIs, longer loan tenure, and high interest rates. Therefore, if your cash flow permits, try to make a larger down payment to save on your interests. Reputed banks and NBFCs have rolled out flexible repayment plans depending on your financial stature.