What is a Down Payment?

Woman giving money to a man

If you’re planning to take out a loan to make a major purchase in the near future, such as a house or a new car, you’ve probably been made aware that you’ll need to make a down payment on your purchase. If this is your first time navigating the process, you may be wondering, what is a down payment? The literal down payment definition is “an initial payment made when something is bought on credit.” This is true, and it’s a great basic explanation to get us started, but there’s a bit more to know about down payments than that. Learn more about the down payment meaning, why it’s required for some purchases, and more with Xpress Cash, below.

What Does Down Payment Mean?

To get started, let’s expand on the down payment definition we covered up above. As you know, when you apply for a loan on an expensive purchase like a new car, you’re borrowing the money from a lender. A down payment is often required by many lenders, and is an out-of-pocket initial payment due at the time of signing on your loan, designed to pay off a portion of your total purchase price right away. Down payments are most often made in cash, but you might also have the option of writing a check or – less often – paying it with a credit card. Some lenders have a minimum required down payment you need to meet, while others simply allow you to pay as much as you can. (link to the other How to Save for a Down Payment blog after publishing) 

Why is a “Down Payment” Required?

Many lenders require a down payment on large purchases like a car or home because it minimizes the potential risks for them. The more money you as a borrower put down on a new car or home, the less money the lender loses if you were to default on your payments in the future.

How is Down Payment Amount Determined?

The standard minimum down payment required for a home is 20 percent of your total purchase price. For an auto loan, the standard minimum down payment required is 10 percent of the total purchase price. Of course, you’re welcome to make a bigger down payment if you wish, and some lenders might even put you in total control of your down payment amount. This conjures the question of whether it’s best to make a larger or smaller down payment. To help make your decision, take a look at some of the benefits of both options:

  • Benefits of a Larger Down Payment
    • You can get a lower interest rate
    • Your monthly payments will be lower
    • Thanks to your lower monthly payments, you’ll be perceived as a stronger candidate for loans in the future
  • Benefits of a Smaller Down Payment
    • You can make your purchase sooner rather than later if you’re not spending extra time to save up for a large down payment
    • Making a smaller down payment will use up less of your hard-earned savings, which can bring peace of mind that you still have money leftover for emergencies

Get Additional Help at Xpress Cash

Have lingering questions about down payment meaning? Feel free to contact us or stop by one of our Michigan locations anytime! Our finance professionals are always happy to help. Need a quick loan solution? Explore our cash advance services today.