DP or down payment is known as one of the methods to start an investment, business, or payment. This term is commonly encountered in the business world. Perhaps you have also used down payment to conduct a transaction.
If understood more deeply, the function of down payment is as an upfront payment at the beginning to agree on a transaction. The nominal amount of the down payment also varies considerably. This depends on the asset and agreement.
For example, 5%, 10%, and the largest is 20%. In this article, we will review what down payment is. From its meaning, advantages, to how it works. Read the following article.
Key Takeaways:
- Down payment is an upfront payment that must be paid at the beginning when purchasing an item or property.
- The benefit of down payment that you can feel is reducing monthly installments.
- The first thing to understand when determining down payment is determining the nominal amount at the beginning.
Down Payment Is
According to Investopedia, down payment is often defined as an upfront payment that must be paid at the beginning when purchasing an item or property, with a credit system. The down payment represents a percentage of the total purchase price, and the remainder is usually financed.
For example, in the context of property, the down payment paid can range from 10% to 30% of the house or apartment price. The down payment can significantly reduce the amount of debt the borrower owes to the lender, the amount of interest to be paid over the loan term, and the amount of monthly payments.
Difference Between Down Payment and Advance Payment
Usually, many people are confused between down payment and advance payment. This is natural because both advance payment and down payment are usually both paid upfront.
In fact, there is a quite fundamental difference between down payment and advance payment. Advance payment or what is known as upfront payment is a direct payment to the owner of the goods, before the ordered goods are delivered. Generally, the advance payment system is used in export activities.
This payment system is usually used for buyers who frequently purchase goods or have been subscribed for a long time. The currency used in this payment depends on the agreement, can use the currency of the exporting country or the currency of the importing country.
Meanwhile, down payment is an upfront payment that can not only be made by old buyers or customers, but also by new consumers and prospective customers.
In addition, generally advance payment applies an amount of 80-90% of the credit amount. While the amount of down payment is based on the agreement between the seller and buyer.
Meanwhile, the definition of down payment in accounting is money that is paid in cash at the beginning, if consumers want to buy goods or services that are quite expensive and are ultimately taken on credit.
How Down Payment Works
Determining the amount of down payment: Financial institutions or sellers usually determine the minimum percentage of down payment. For property, it generally ranges from 10%-30%, while for motor vehicles it can be lower.
Paying the down payment: After agreeing on the price and terms, you are required to pay the down payment as part of the agreement.
Financing the remaining price: The remainder of the unpaid item price will be financed by a bank or financial institution in the form of credit.
Installment payments: Then you are required to pay the remaining price through installments according to the agreed tenor. The amount of installments depends on the loan amount and the credit period you choose.
Benefits of Down Payment
Quoting from Glints, there are several benefits you can feel regarding down payment. Read the following explanation.
1. Reducing Loan Amount
By paying a larger down payment, the amount of loan you need to take will be less. This means the interest burden you have to pay will also be lower, so your total expenditure during the credit period will be lighter.
2. Lightening Monthly Installments
The larger the down payment you pay, the smaller the remaining debt that must be paid in installments. That way, your monthly installments will be lighter and will not burden your monthly finances. This is very important to maintain the balance of your personal finances to remain stable.
3. Increasing Credit Approval Chances
When you pay a larger down payment, this shows that you have better financial capability. Banks or financing institutions tend to more easily give credit approval because the risk of default is considered lower.
4. Reducing Interest Burden
In property or vehicle credit, the larger the loan, the larger the interest that must be paid. With a larger down payment, your loan amount is smaller, so the interest burden will also be lighter.
5. Accelerating Asset Ownership
If the down payment you pay is quite large, the credit period or installment tenor can be shortened. This means you can pay off the debt faster and immediately own the asset in full without being tied to installments anymore.
6. Can Make Loans at Another Time
The advantage of down payment relates to trust to make loans at another time. Most creditors believe that down payment is a form of the debtor's seriousness when applying for a loan. In other words, making a down payment in a large amount indirectly gains trust from the loan provider.
7. Lower Interest Rates
In some cases, providing a larger down payment can result in a lower interest rate on the remaining loan. This is because lenders see buyers as a lower risk, so they are willing to offer more favorable loan conditions.
Down payment has a number of significant benefits that can affect purchasing decisions, long-term finances, and ease in getting approval for large purchases. By considering these benefits, buyers can make better decisions about how much down payment they should provide for their next investment or purchase.
8. There are Remaining Funds
If you pay a down payment in a small amount, you still have money for other things or needs. In addition, at least you can still save an emergency fund reserve.
That emergency fund can be used for various things. For example, for home repairs and covering a number of unexpected costs. This can certainly help you in managing your finances.
Understanding Down Payment Journal
Because down payment is a payment process carried out at the beginning of a transaction, of course there needs to be a special way of writing down payment in the accounting journal. How do you write sales with down payment in the down payment journal?
Previously, it needs to be mentioned briefly that there are two situations that will differentiate the recording. The differentiator is whether value-added tax (VAT) is included in the down payment or not.
Down payment will be subject to VAT if the goods are taxable goods and the institution or company is also a taxable company. However, if the goods are not taxable goods, VAT does not need to be added.
Examples of Down Payment in Various Transactions
Down payment not only applies to property or vehicle purchases, but can also be applied in various other transactions. Here are the categories.
Electronics purchases: For example, when you buy electronic goods with an installment system at certain stores, you usually have to pay a down payment as an initial guarantee.
Purchase of travel or tourism packages: Some travel agents apply a down payment system to order vacation packages or flight tickets. The down payment is paid as a sign of booking confirmation.
Property rental: In some cases, down payment is also applied in the property rental process, where the tenant pays a certain amount of money at the beginning as a guarantee.
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Now you increasingly understand about the meaning of down payment. To achieve that goal, you can maximize savings at BTN.
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