Making a down payment on a loan gives the borrower which of the following?
a. a large total amount financed
b. a strong incentive to default on the loan
c. an incentive to make late payments.
d. actual investment in the purchased item
****I'm not sure, but I think the answer may be choice D.
I agree, d.
You are correct! The answer is choice D. Making a down payment on a loan gives the borrower a sense of actual investment in the purchased item.
To explain how to arrive at this answer, let's break down the options:
a. A large total amount financed: This would be the opposite effect of making a down payment. When a borrower makes a down payment, it reduces the total amount financed, so this option is incorrect.
b. A strong incentive to default on the loan: Making a down payment usually indicates the borrower's commitment to repay the loan. By putting their own money upfront, they have a higher stake in the loan. Therefore, this option is incorrect.
c. An incentive to make late payments: Making a down payment does not typically create an incentive to make late payments. In fact, borrowers who make a down payment often strive to maintain timely payments to protect their investment. Hence, this option is also incorrect.
d. Actual investment in the purchased item: This option correctly reflects the significance of making a down payment. When a borrower pays a portion of the item's value upfront, it showcases their commitment and ownership in the purchase. By having financial skin in the game, a borrower is likely to be more responsible and motivated to repay the loan.
Therefore, the correct answer is d. actual investment in the purchased item.