Down payment refers to a portion of an item’s total cost that is paid initially a buyer. This is usually required when purchasing an expensive product, such as a house.
A down payment is not refundable. This assures the seller that the buyer will complete the necessary payments for the purchase. In fact, the higher the downpayment is, the more assurance the seller has of the buyer’s intent to complete the transaction. Giving a down payment also serves to benefit the buyer, because it ensures that the seller does not sell to anyone else.
Down payments are usually settled in cash. In some cases, however, the a down payment may be linked with credit. If, for example, the buyer does not have the sufficient funds to make a downpayment, he may choose to apply for a downpayment grant. To pay for the balance of the purchase price, the buyer almost always has to apply for a loan.
In cases when a loan has to be secured in order to pay for the balance, the down payment also serves as assurance to the lender that the amount approved for the loan will be recovered even if the borrower can no longer fulfill his financial obligations. This is especially true in the context of real estate, where the property itself serves as loan collateral. Therefore, the larger the downpayment, the more coverage the lender has in the event of a loan default.