Down payment

A down payment (in Slovak, akontácia) is the amount you pay at the moment of purchase when the rest of the price is financed by a loan or a lease. You meet it most often when buying a car, electronics or furniture on instalments. The larger the down payment, the less you borrow.

How it works

The down payment is usually quoted as a percentage of the price. It is subtracted from the price, and what remains, the amount financed, becomes the principal of the loan. That is then repaid in regular instalments, typically as an annuity.

A down payment is not refunded. It is not a deposit you get back: it is part of the price, paid earlier.

Formula

The amount financed is the price minus the down payment:

$$U = C \cdot \left(1 - \frac{a}{100}\right)$$

• $U$: the amount financed, i.e. the loan, in euros
• $C$: the purchase price in euros
• $a$: the down payment as a percentage of the price

The monthly payment is then worked out from $U$ with the same annuity formula as a mortgage. Because the payment is proportional to the loan, cutting the loan by a given percentage cuts the payment and the total interest by the same percentage.

A worked example

You buy a car for €20,000 over 5 years (60 payments) at 8% a year.

With no down payment you borrow the full €20,000. The monthly payment is €405.53 and the total interest is €4,331.67.

With a 20% down payment you pay €4,000 now and borrow €16,000. The payment falls to €324.42 and the interest to €3,465.34.

The €4,000 down payment therefore saves €866.33 in interest and €81.11 a month in your budget.

You can check it in the mortgage calculator: enter a price of €20,000, a 20% deposit, an 8% rate and a 5-year term.

Down payment and a mortgage deposit

For a mortgage, Slovak uses a different word, vlastné zdroje (own funds), but the role is the same: the part of the property price the bank does not finance. Its size is tied directly to the LTV: the larger the deposit, the lower the LTV and, as a rule, the better the rate.

What to watch out for

Compare total cost, not the down payment. A "0% down" offer can sound attractive, but all the interest is then charged on a larger amount. Compare offers by APRC and by the total you will pay.

Do not spend your safety buffer. A bigger down payment saves interest, but the money is then tied up in the car. If it would leave you without a reserve for unexpected costs, the interest saved may not be worth it.

Check what is being financed. Some contracts may add fees or insurance to the amount financed. Check which amount the down payment and the instalments are calculated from, not only the advertised price.

Related

How the remaining amount turns into a monthly payment is explained under annuity. When buying a home the same role is played by LTV and your deposit, which you can try out in the mortgage calculator.