Down Payment is a form of cash payment made at the beginning of a transaction for the purchase of expensive goods or services.
Prepayment
Concept
Down payment in English is Down Payment.
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Prepayment is a form of cash payment at the beginning of the purchase of an expensive good or service. This payment represents a percentage of the full purchase price.
In some cases, the advance payment will not be refunded if the transaction agreement is not successful due to the buyer side.
After paying the down payment, the buyer makes financial arrangements to pay the remaining amount to the seller.
For example, in the United States, many homebuyers have to pay 5% to 25% of the home’s total value upfront, with the rest paid for by a bank or other financial institution through a mortgage loan. Similar to when buying a car, the buyer also has to pay a certain amount up front.
How prepayment works
Prepayments reduce the amount of interest paid over the life of the loan, reduce monthly payments, and allow lenders to provide a certain level of security.
In the home purchase transaction
In the US, the standard down payment that lenders require is 20% for a home. However, people in the US can also buy a home with a down payment requirement of as little as 3.5% as in federally funded loan programs.
There are some cases where an increase in down payment is necessary, such as when purchasing a jointly owned property, which is common in large cities due to the increased risk.
In the car purchase transaction
In a car purchase, a down payment of 20% or more can make it easier for buyers to get better interest rates and loan terms, as well as a faster loan approval process.
Some car dealerships may not require an upfront payment for some buyers, but that also means higher interest rates on this car loan.
Some notes
Determining a down payment is often a complicated process, and there are some areas of business that require more careful calculation of the down payment than others.
Prepayments also provide lenders with a certain level of security. Basically, if you’ve already made a down payment, your chances of defaulting on your loan are lower.
With this in mind, mortgage lenders often offer lower interest rates to borrowers who have made large downpayments.
Effect of Prepayment
Interest rate
If you pay upfront before making a purchase and borrow money to pay the rest, the interest you pay over the life of the loan is immediately reduced.
Assuming you borrow $100,000 at 5% interest, the first year you need to pay interest is $5,000. If you already paid the $20,000 down payment, you only need to borrow another $80,000.
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As a result, your first year interest is only $4,000, saving you $1,000.
So, the larger the down payment, the more interest you will save over the life of the loan.
Monthly payment
The down payment also reduces the monthly payments on installment loans.
Let’s say you buy a car for $15,000. If you take out a $15,000 loan at 3% interest for four years, your monthly payment is $332.
However, if you make a $3,000 down payment, you only need to borrow $12,000 and your monthly payment drops to $266. You’ll save $66 per month or $3,168 over the loan’s 48-month life.
Down payment and deposit
A deposit is the amount of money you pay to secure you’ll buy a property, in other words, you’re proving that you’re serious about buying the property. The deposit does not have a predefined requirement.
When you offer to buy a property with a real estate agent, they will ask for a deposit. That amount will depend on the purchase price and how fast the transaction is. This amount will be based on the asset purchase price at the close of the transaction and is part of the upfront payment. If the transaction fails, the deposit is also forfeited.
A down payment is the amount you pay before you buy a property. Prepayments typically range from 5% to 20% of the total property value.
Usually the upfront requirement will vary depending on the transaction you make. If you are an employee, you will be required to pay at least 5% in advance.
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For self-employed individuals, they are required to pay at least 10% upfront, and if you are purchasing a rental/investment property, you will need to make a minimum of 20% down payment.
