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What Is a Down Payment?

A down payment is a term used to refer to a certain portion of the total amount when making a purchase that is relatively costly. A down payment often applies to purchases such as housing units, cars, and expensive luxury goods. The rationale behind a down payment is that the buyer is committed enough to go through with the purchase. Another way of thinking about it is that a down payment serves as a sort of security for the seller. In the event that the buyer changes his mind about the purchase, the seller usually has the right to keep the down payment.

The amount required as down payment varies depending on where you are and what you are purchasing. In the United States, for example, down payments for houses can be anywhere from 3.5 to 20 percent of the purchase price. One might be able to negotiate a lower rate, especially with the real estate market not being in the best of health. For car and other vehicle purchases, the down payment rate is lower at 3 to 3 percent.

Since the average person may not have the cash lying around for considerable sums, there are options for obtaining the money for down payments. Some financial institutions offer loan structures which will cover the down payment. This results in practically no cash requirement on the outset for the buyer. However, it also almost always means that the terms for repayment are less favorable than if the buyer were to make a down payment.

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