Down Payment

A down payment is a type of payment, often in cash, made in the early stages of a purchase of an expensive good or service. The payment represents a percentage of the full purchase price. In most cases, the purchaser makes financing arrangements to cover the remaining amount owed to the seller.

Down payment requirements are a problem for many borrowers with bad credit. For most of these buyers, down payments require some advanced planning and many of them are not used to setting up a budget so they can save up for one. In addition, many of these borrowers are working with a tight budget.

All the same, most lenders require at least $500 to $1,000 or 10 percent of the selling price of the vehicle, whichever is less – although in many cases they may require more. The internal reason for this is that lenders have found that borrowers with $500-$1,000 of their own money invested in a vehicle will usually think twice before defaulting on a loan. Not surprisingly, the larger the down payment, the lower the risk, as higher down payments mean a greater chance that the loan will be completed successfully.

The money for the down payment has to come from the buyer and must be either in cash or real trade equity (most subprime lenders will book the trade-in and won't allow dealers to inflate the price (called power booking) of the trade – a practice dealers sometimes use so they can show trade equity as a down payment). Buyers also cannot take out a loan to pay the down payment (known as "double-dipping" in the business).