A down payment is the part of a purchase price that you pay up front instead of borrowing or financing. It is common when buying a home, car, or expensive item like a computer. Down payments matter because they reduce the amount you still owe and can lower your monthly payments.
They also show the lender or seller that you are financially committed to the purchase.
The basic idea is simple: total price minus down payment equals the amount financed. A larger down payment usually means a smaller loan, less interest paid over time, and sometimes better loan terms. For example, if a car costs 4,000 up front, you only need to finance $16,000.
Students can think of a down payment as paying part of the cost now to reduce the financial burden later.
Key Facts
- Down payment = money paid up front toward a purchase.
- Amount financed = purchase price - down payment.
- Down payment percent = down payment / purchase price × 100%.
- A larger down payment usually lowers the loan amount and monthly payment.
- Example: 20,000 car is 20,000 × 100% = 20%.
- Down payments do not erase the total cost, they shift part of the cost to the beginning.
Vocabulary
- Down Payment
- A down payment is money paid at the start of a purchase to reduce the amount that must be borrowed or financed.
- Purchase Price
- The purchase price is the full listed cost of the item before subtracting any down payment.
- Amount Financed
- The amount financed is the part of the purchase price that is paid later through a loan or payment plan.
- Loan
- A loan is money borrowed that must be repaid, usually with interest.
- Interest
- Interest is the extra cost paid for borrowing money over time.
Common Mistakes to Avoid
- Confusing the down payment with the full price, which is wrong because the down payment is only the part paid up front.
- Forgetting to subtract the down payment before calculating the amount financed, which makes the loan look larger than it really is.
- Thinking a bigger down payment makes the item cheaper, which is wrong because it usually lowers the borrowed amount but not the purchase price.
- Ignoring interest and fees, which is wrong because the amount financed can cost more over time than the original unpaid balance.
Practice Questions
- 1 A laptop costs 300 down payment. What amount is financed?
- 2 A car costs $18,000 and the buyer pays 15% down. How much is the down payment, and how much remains to be financed?
- 3 Two students buy the same 100 down and Student B pays $300 down. Explain which student will likely have smaller future payments and why.