A down payment is upfront or initial payment that is made to the seller or financial institution, to secure the sale of a big-ticket purchase such as a property. Read to know the benefits of paying and accepting a down payment for a buyer and seller.
The term ‘down payment’ is often heard in real estate transactions. Commonly used interchangeably with ‘deposit’, it refers to a certain percentage of the total sale price, which is paid by the buyer to finalize the sale. Thus, the down payment acts as a guarantee.
How is the down payment quoted?
It is quoted as a percentage of the total cost. For example, to buy the latest SUV, one may have to pay 15% of the total cost while the remainder will be paid through the vehicle loan sanctioned by the bank. Note that the down payment is made from one’s own funds and is not obtained through a loan.
Benefits of down payment
There are multiple benefits to making a down payment in a transaction:
Benefits of making a down payment for the buyer
- You will need to part with only a certain amount of the complete payment. This ensures that your liquidity is preserved.
- In case you want to purchase the product a little later, you can secure the product/service in the meantime by paying a down payment. This way, the seller will not be forced to sell the product to another interested purchaser.
- A higher down payment eventually also reduces the burden of monthly installments for the buyer. Let us examine two scenarios:
Suppose that Vikas is buying a property worth Rs 55 lakhs. His down payment towards this purchase is 10%, that is, Rs 5.50 lakhs. Let us look at what his EMI would be if he takes a loan from PNB Housing at an interest rate of 8.85 for 10 years.
Benefits of making a down payment for the seller/service provider
- At times when two interested parties come for the same product, you can ask for a down payment. It is an easy way to secure the sale.
- The risk of losing out on a potential sale, because of a prospective buyer’s liquidity issue is mitigated, once he/she pays a down payment.
Important things to know about down payment
- In case a buyer cancels the sale, a down payment is usually non-refundable.
- A down payment contributes to the complete payment towards the sale.
- Besides a vehicle or property purchase, sellers of other labor-intensive products may also ask for a down payment, to finalize a sale. For example, while going in for luxurious furniture that requires customization, the seller may ask for a down payment that will serve as a guarantee that the buyer will not change his/her mind about the purchase.
Down payment and house purchase in India
Can I buy a property with only a 10% down payment?
Usually, the norm in India involves making a down payment of 20%, as most financial lenders are agreeable with this amount. However, in certain cases, they may agree and settle for a 10% down payment, as well.
Can I take a loan to pay the down payment?
Most mortgage lenders will not allow you to take a loan to pay the down payment, which is why it is called the ‘out-of-pocket payment’. People usually fund the down payment through their savings or investments. These days it is not uncommon for potential buyers to seek an unsecured, collateral-free loan through some financial institutions. For this, the loan-seeker must have a good credit score.
source – https://housing.com/news/what-to-know-about-down-payment/