Down Payment: Definition, How it Works, and Benefits

Do you want to buy products on credit? DP is a condition that must be paid at the beginning of the product purchase.

This security deposit is usually needed when you want to return goods or items of high value.

Even when you buy a cell phone, there are some stores or companies that require you to pay a deposit first to secure delivery.

If you don't understand down payment, don't worry. We have prepared a detailed explanation of how these down payments are defined and how they work.

What is downpayment?

Down payment is a cash payment made when you want to buy goods and real estate that are quite expensive on credit. If you want to buy expensive assets such as vehicles or property, chances are that the rest will be paid in installments.

Down payment is an advance that is part of the total price. This is also part of the purchase price and does not include any loans.

While of course it is installments, a down payment acts as a kind of guarantee to the seller that you will pay the rest of the payment. Meanwhile, down payments for buyers serve to secure the goods or services purchased so that they are not taken over or purchased by someone else.

In some cases, you may be able to receive a down payment back if the purchase is actually canceled and the goods or services purchased are not used. Although usually the down payment that is returned is not full, but only a few percent.

How Downpayments Work

The working principle of a down payment is that the larger the nominal you pay at the beginning, the smaller the installments you have to pay later. Even so the interest that must be paid every month on redemption.

The smaller the amount of payment that must be made, the lower the interest that must be paid later.

Down Payment Benefits

If you want to pay a down payment you usually have two options. Pay DP in large or small amounts. Here are some of the big and small down payments.

1. Big Down Payment Advantages

• Low interest rates

If you make a down payment in large amounts, you will automatically receive lower interest. So you can reduce your expenses in the long run by paying interest in addition to monthly payments.

• Smaller payments per month

Not only are the interest rates low because you deposit quite a lot of money in the beginning, the balance you have to pay in installments is also low.

• Gaining trust to do credit at a later time

High down payments can also help you gain the trust of creditors. This will definitely help if you decide to refinance later.

2. Small Down Payment Advantages

• Obtain goods at minimal cost

By paying a down payment in small installments, you can get goods for not too much money

• Installments according to the budget you have

Even though the payment is higher and the time period is longer, you can still pay it according to the available budget.

• There is still money left over for other purposes

If you pay a small down payment, you still have money for other things or needs. Also, you can keep at least one emergency backup.

Emergency funds can be used for many things. For example, for home repairs and to cover incidental expenses. It can definitely help you manage your finances.

• Can make purchases faster

Of course, if you have to raise about 20% of the funds for the mortgage, it could take you years to collect it. For some people, these values ​​may not be difficult. However, others face difficulties and even take decades to collect the money. A small deposit speeds up the buying process.

That's the explanation about the down payment. Hope it is useful!