Down payment definition

What is a Down Payment?

A down payment is a cash payment made at the beginning of a purchase transaction. It is usually required by the seller of goods or services that are expensive and/or customized for the needs of the buyer. If the sale falls through, then the seller can keep the deposit and recognize it as revenue. The amount of a down payment usually approximates the material cost of the product being sold, so that the seller will not lose if the sale does not happen.

In the case of a lending arrangement, the down payment reduces the total interest expense for the borrower and provides some security for the lender, since someone who has made a down payment is less likely to default on the associated loan.

Example of a Down Payment

The purchaser of a car pays a distributor a 20% down payment for the vehicle, and takes a financing deal from the distributor for the remainder of the amount. As another example, a custom furniture manufacturer requires a 50% down payment on any furniture that it produces to custom specifications.