Installment plan is a method of buying on credit. A store which sells goods on the installment plan usually requires that the buyer pay part of the price of an article at the time of the sale. The buyer then must pay equal parts of the remainder at stated times thereafter, until the bill is paid in full. These payments are called deferred payments, and may be extended over varying periods of time.
How the plan works.
The usual method of buying a car on the installment plan is as follows. A family buys a car from a dealer for a cash price of $12,000, for example. But when they ask for time payments, they must pay a finance charge in addition to the cash price. These charges vary according to the risk involved, the length of time the installments cover, and several other factors. In this example, the finance charge may be $2,200. The family must actually pay $14,200 for their car.
The buyer normally makes a down payment of one-fourth of the cash price, in this case $3,000. The buyer must then pay $11,200 in installments. This is called the total time price. The dealer normally discounts the bill by selling it to a finance company that pays the dealer the remaining $9,000 due on the car (see Finance company ). The finance company collects this $9,000 plus the $2,200 finance charge directly from the buyer. The debt is divided into equal monthly payments. If the contract calls for 48 monthly payments, the family pays $233 a month. If the family fails to make a payment, the finance company may cancel the payments and claim the car.
The finance charge ($2,200 as above) covers interest on money that the finance company obtains from sale of stock, from reinvestment of earnings, or from long- or short-term creditors. By transferring the installment payments to the finance company, the dealer makes what practically amounts to a cash sale. The dealer avoids investment in receivables, or accounts due, and is able to carry on a larger volume of business.
There are several varieties of the installment plan. The United Kingdom uses a hire purchase system. The buyer literally borrows an article and pays monthly installments as a sort of rent. After a certain number of installments have been paid, the person may buy the article for a fraction of the total rent obligation. The rents are subtracted from the purchase price, but finance and insurance charges are added.
Great Britain and other countries have credit checks. The credit check is used to purchase articles at certain stores. After a down payment, the credit check is paid for on the installment plan. The difference is that the credit check is actually bought before the purchases are made. Australia has a similar check, called a cash order, which is used in the same way.
History.
Records show that some homes in ancient Rome were bought on the installment plan. At the beginning of the 1800’s, a furniture company in New York started an installment plan. Several other companies followed. In 1916, the new automobile industry caught up the idea. A few years later the plan had spread to many other industries. Today many articles with resale value are paid for under the installment plan. Such goods include automobiles, farm machinery, furniture and home appliances, and homes.
