The correct answer is:
1. Unlike collateral, down payments are used to secure credit. Collateral is an asset or property that a borrower offers to a lender as security for a loan. If the borrower fails to repay the loan, the lender can seize the collateral to recover the loan amount. On the other hand, a down payment is an initial payment made by the borrower when purchasing a good or service on credit. It demonstrates the borrower's commitment and ability to repay the loan.
2. Down payments do not decrease risk for lenders. Collateral, such as a house or a car, reduces the lender's risk because it provides a form of security that can be used to recover the loan amount in case of default. Down payments, although they show the borrower's commitment, do not offer the same level of protection for the lender.
3. Down payments can affect the interest rate. Making a larger down payment can lower the interest rate on a loan. Lenders may offer better terms and lower rates to borrowers who put down a substantial amount upfront, as it reduces the lender's risk and demonstrates the borrower's financial stability.
4. Down payments do not reduce overall debt. The down payment is an initial payment made towards the purchase of a good or service, such as a house or a car. It is part of the total cost of the purchase and does not directly reduce the overall debt amount. The debt amount is determined by the total purchase price minus the down payment.
