Down payment is a pretty basic term when it comes to talking about finance. Do you know why we do it, or what that money covers? What if we give a down payment and we don’t want to follow through with the deal we put the money down for? This is what I will be covering in today’s post.
What is a down payment?
A down payment is a cash payment a buyer gives the seller that is a percentage of the total cost of the item that is being purchased. These items are usually quite expensive. This is why the buyer only puts down a relatively small down payment. This payment acts like an agreement that you want the item and are going to have a bank lend you the rest of the money and then pay the bank back. To put that last line into more context; after doing a little bit of researching and reading it seems that the most common thing people associate a down payment with is when they are getting a mortgage.
So, how that would work is, let’s say you are buying a house that is selling for $200,00 out the door, all taxes, closes costs, etc included. It is recommended that you pay at least 5-25% of the total cost of the item being purchased. A little side note: the more you put down as a down payment the lower your monthly payments will be, generally speaking.
Back to the example, so you decide to put down 20% of the total cost of the house ($200,000) this would mean you’d have to have $20,000 cash to give to the bank for your down payment.
What else can down payments be used for?
As I mentioned earlier, down payments seem to be highly associated with mortgages, this is true, but down payments also are used when buying a vehicle. They are used when someone is buying something that is expensive and cannot be purchased out right in cash by the person buying the item.
What if the deal falls through?
This type of scenario will be based on your exact circumstances. Meaning, it depends on the type of agreement made between you and the other parties involved. Your down payment might be fully refundable if you can’t complete your part of the deal or if the other party cannot complete their part of the deal. On the other hand, your money may only be partially refunded to take care of any administrative costs it took to cancel the deal, or you may get your full down payment back.
When going through this process, be sure to ask questions and see what happens to your down payment in the instance of the deal falls through for any particular reason.
When dealing with a lot of your own cash, you always want to make sure you understand the situation.
In the end
Down payments are pretty common. I personally gave a down payment when I purchased my car 7 years ago. I think that was the only down payment I have given before. I should be saving for a down payment for a house.. that’s a different story.
Down payments are used by majority of people and they are perfectly fine to do, because most people don’t have tons of cash laying around to buy expensive items without getting a loan.
Just be sure to understand the terms of your down payment and you are positive you can handle the loan you are about to get with that down payment. Think about what you are doing with your money first.
Have you had any issued with a down payment? Any horror stories? Good stories? Sound off in the comments.