Pierre Money Mart Blog

A lump sum cash payment paid by a buyer when he or she purchases a major piece of property such as a car or house. The buyer typically takes out a loan for the balance remaining, and pays it off in monthly installments over time. 

The term “down payment” is used in the context of large, expensive purchases, such as those of cars and houses, whereby a loan is required to make the full payment. 

The main purpose of a down payment is to ensure that the lending institution can easily recover the amount of the loan in the event that the borrower goes into default. Typically, a loan involving a down payment is obtained for the purpose of purchasing some sizable asset such as a home or a car. The asset in question is then used as collateral in order to secure the loan against default. If the borrower fails to repay the loan, the lender is legally entitled to sell the asset and retain a portion of the proceeds sufficient to cover the original amount of the loan. By requiring a down payment in advance, the lender greatly increases the chance that any such future sale would be able to cover the full amount of the loan, because such a sale only requires the lender to recover the difference between the original selling price and the amount of the down payment, as opposed to the entirety of the original selling price.