Down Payments

By Chandler Sullivan
July 18, 2022 | 2 Min. Read

What is a Down Payment?

A down payment is a sum of money that needs to be paid or put away in the stages of buying a good or service. The down payment is a portion of the final cost whereas the rest is traditionally financed by loan or installment payments.

Think of a down payment as being like collateral for a promise to pay something in full– you put money down to reserve that you promise to pay the remaining balance off in (usually) monthly payments. A down payment is usually the first step to owning a home or car. Of course, essentially this lump sum is to help jump-start payments for owning something but there is more to it than just monthly payments.

How do Down Payments Work?

In most cases, a down payment is not refundable if the purchasing deal falls through for the buyer. A down payment can be considered a deposit, especially in the example of payments on houses or cars. For example, as a home buyer, you may have to pay 10% of the total price of the home upfront as a down payment while taking out a mortgage to cover the remaining costs. Similarly, car purchases work the same way.

Depending on the borrow, type of purchase, and loan, lenders may require anywhere from as low as 0% down payment or as high as 50% The higher the down payment, the less the buyer will need to borrow to complete the transaction. The lower their monthly payment is, the less they’ll pay in interest over time. There is also no limit to putting down more than the minimum down payment.

Due to down payments being linked to home loans, car loans, and other types of repayment options, it is important to understand how your credit will affect your ability to supply a down payment and pay back the remainder of the purchase.

Examples of Down Payments

Home Payments

The average down payment for a home range from 10% to 20%. However, there are options for mortgages with 15% or less in down payments, with home loans that offer even less in down payments and interest rates. Check out your options for home loans with bad credit that may offer some relief to down payment minimums.

Auto Purchases

For car purchases, it is traditional to have a down payment of 20% or more for buyers to get approved for a loan with better interest rates and terms. Some car dealers may offer promotional 0% down for specific qualifying buyers. Although that means no down payment is required, it may mean that they will charge a higher interest rate on your loan. Check out your options for car loans with bad credit that may offer some relief to down payments or high-interest rates.

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