Finance · Glossary
What is Down Payment?
Quick definition
The upfront cash portion of a purchase, paid at closing. The remainder is financed through a loan or mortgage.
Full explanation
A down payment is the portion of a large purchase paid in cash upfront, with the balance financed. For homes, 20% is the traditional benchmark — below that, most lenders require PMI. For cars, 10–20% is standard. The size of the down payment affects: (1) the loan amount, (2) the monthly payment, (3) the interest paid over the loan life, (4) whether PMI is required, and (5) the interest rate offered (larger down payments often get better rates). A larger down payment also reduces the lender's risk, so the loan is more likely to be approved. There are also opportunity costs — cash used for a down payment cannot be invested elsewhere.
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Calculators that use or explain Down Payment.
Related terms
More from Finance
APR (Annual Percentage Rate)
The yearly cost of a loan, expressed as a percentage, including most fees. Used when borrowing money.
APY (Annual Percentage Yield)
The yearly return on a deposit or investment, including the effect of compounding. Used when saving money.
Compound Interest
Interest calculated on the initial principal AND on the accumulated interest from previous periods. The engine of long-term wealth.
Simple Interest
Interest calculated only on the original principal, not on accumulated interest. Used in short-term and consumer loans.
Principal
The original sum of money borrowed or invested, not including interest. The base on which interest is calculated.
Amortization
Spreading loan payments over time so each payment covers both principal and interest, with the loan fully paid off at the end.
Last reviewed: June 15, 2026 • Category: Finance