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Installment buying is a type of credit purchase where the buyer makes regular payments to the seller. It includes in-house financing, vehicle purchases, and mortgages, with interest applied to the principal amount. The buyer may not take possession until the debt is fully repaid.
Installment buying is a type of loan or credit purchase in which the buyer agrees to make regularly scheduled installment payments to the seller. Depending on the terms of the purchase agreement, the buyer may or may not be required to provide the seller with any type of front-end down payment. There are several different types of installment purchases, including the use of installment payment plans, in-house financing for furniture, and even the purchase of cars or houses.
The basic approach to hire purchase involves a seller agreeing to enter into a transaction with a buyer who does not require the full purchase price to be paid in advance. Instead, the amount due, plus any applicable interest, is divided into a series of payments that the buyer agrees to remit regularly, usually monthly. Depending on the terms of the purchase agreement, the buyer is granted possession of the purchased product and is free to use it as he wishes. In the event that the buyer does not comply with the installment purchase plan, the seller may take steps to recover the product as a means of partially recovering the losses of the transaction.
One notable exception is that with installment payments, consumers typically do not take possession of the products purchased until the debt is fully repaid. At one time, this approach was often used to finance the purchase of major household appliances, as well as to insure goods for use as holiday gifts. Once the terms of the installment plan were met, the store would deliver the purchased goods to the buyer and arrange delivery if necessary. While the use of credit cards to purchase goods is a more common approach today, this form of installment purchase is still offered by a limited number of large retail chains, and is sometimes provided by locally owned stores and businesses.
The purchase of a vehicle is one of the most common examples of purchase on installments today. With this strategy, a qualified buyer obtains extended financing for the purchase. Interest is applied to the principal of the loan, and the total is divided into a series of monthly payments. Once all payments are submitted, the lender waives any claim on the collateral used for the loan and the owner has sole possession of the vehicle.
A mortgage is also a form of installment purchase. Typically, the lender requires the buyer to make a deposit or down payment on the property being purchased. The remainder of the balance owed is financed and a series of monthly installments are paid until the debt is paid off in full. With installment purchases of this type, the lender can extend a fixed or variable interest rate on the entire balance of the loan. Borrowers can sometimes refinance such a loan when interest rates drop below the current rate applied to the loan, thereby reducing the amount of monthly installment payments.
Smart Asset.
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