Question

What is the purpose of requiring that a borrower make a down payment before receiving a loan?

Answer 1

Down payment refers to a partial initial payment of the full amount paid by the borrower to buy an asset. The total value of the asset is paid in two parts, first is the initial down payment and then the remaining part is paid through loan amount.

There is a possibility that the lender might not be ready to finance the full value of an asset and requires the borrower to pay some part of the total value as down payment. This decreases the lender's risk.

So, the main purpose of down payment by borrower is to reduce the default risk.