A down payment is an upfront, initial payment made by a buyer as part of a larger transaction, typically for the purchase of a high-value item or property. It represents a percentage of the total cost and is paid at the outset of the transaction to secure the purchase.
Purpose of a down payment:
- Risk reduction: For sellers, a down payment provides assurance that the buyer is committed to the purchase.
- Equity building: For buyers, a down payment represents the initial equity in the purchased item or property.
The specific percentage required for a down payment varies depending on the nature of the purchase and the policies of the seller or lender. A larger down payment often leads to more favourable loan terms, such as lower interest rates or shorter loan durations.
In some cases, the size and terms of a down payment may be negotiable between the buyer and seller. Buyers should carefully consider their financial situation and budget when determining the size of a down payment. It’s important to strike a balance between making a substantial initial payment and ensuring they have sufficient funds for other financial priorities.