Buy now, pay later — this is installment buying described in four words. Installment plans are a popular form of buying in which buyers gradually pay for something in incremental payments. By the end of this article, you will understand all of the basics of this type of financing.
Installment buying gives consumers the option to buy now and pay later. It is a credit agreement between a buyer and seller that allows the buyer to purchase a good and extend the payment over a set amount of time. This benefits those who are buying large and costly consumer goods, as they can usually still use the goods without having to front the entire cost. You will likely encounter installment buying, so keep reading to learn all about it.
What is installment buying?
Installment buying refers to an agreement between a buyer and seller in which the seller pays down the price of a product in intervals over time. Installment payment plans are a form of short-term credit or loans to finance purchases. Each payment toward the total purchase price is called an installment.
How does installment buying work?
Installment plans can vary among buyers. In general, the buyer and seller sign an agreement determining how often and at what amount installment payments will be made. Some sellers will require a down payment on the good or service.
Usually, the buyer takes possession of the goods at the beginning of the agreement. In some cases, like layaway plans, the consumer only receives the item after paying down the debt.
Consumers usually make payments monthly until they’ve paid the full cost of the good or service. The terms of installment financing plans will typically range from three to eighteen months, on average.
Installment buying examples
Installment buying comes in many forms. Here are a few examples of financing purchases using this method.
- Layaway plan: Layaway plans allow consumers to pay for goods over time. A customer pays a deposit on an item and makes consistent payments until the item is fully paid off. Unlike other forms of installment plans, the business holds the item until the buyer pays the full price. Many retailers offer this deal as a benefit to their customers.
- Automobiles: Installment buying is most commonly used to purchase durable goods such as cars. For example, you go to a car dealership and make an agreement with the seller to finance your car via monthly payments over a set amount of time. You get the benefit of driving your car while paying down the full cost over an extended amount of time.
- Personal loans: Commercial banks often offer personal loans, which are a form of installment payment plans. With a personal loan, there is no exchange of goods, just money, so all you’re “buying” in the case is the privilege of having and using money you still need to earn. A borrower obtains this type of loan from a bank or other lender, agreeing to pay it off over a set amount of time, usually with monthly payments.
- Online installment buying: Online financing has emerged in recent years. Services such as Klarna and Afterpay partner with online retailers to offer the virtual form of buying items in installments over time. A consumer can purchase goods online, receive those goods, and pay for them monthly. The installment buying services act as a credit lender for the consumer. Learn more about Afterpay with SuperMoney.
For more detail on a subcategory of installment buying called installment loans, read this SuperMoney article.
To learn more about personal loan opportunities available now…
What happens if a buyer defaults on an installment plan?
A default occurs when a buyer stops making payments on an installment plan. Defaulting is detrimental to your credit score. If this happens, the seller has the right to take back possession of the goods. The seller also keeps all previous payments. Terms of contracts will vary depending on the seller.
Pros and cons of installment buying
Installment buying can be advantageous to both buyers and sellers. As with any form of financing, there can be downsides, too.
Here is a list of the benefits and the drawbacks to consider.
Advantages of installment buying
- Installment selling benefits businesses because buyers are more likely to make purchases if they have the option to enroll in a payment plan.
- Sellers have the opportunity to earn credit on installment payments.
- Installment buying gives consumers without other available lines of credit the opportunity to make larger purchases.
- With installment plans, you benefit from using an expensive product while paying for it gradually.
- The introduction of online installment services has led to the rapid growth of this kind of financing.
Disadvantages of installment buying
- With layaway plans, consumers may not be able to use products until they have paid down their installment credits completely.
- Consumers may have to pay interest on installment plan payments, making it a more expensive purchase in total.
- Offering installment financing opens up sellers to the risk of their buyers defaulting on payments.
- Installment buying benefits both buyers and sellers. It encourages more purchases because buyers can enjoy a product without having to pay the entire cost upfront.
- Installment plans allow consumers to purchase something by opening up a line of credit with a business and making installment payments over time until the entire cost is paid.
- Installment buying is a way for buyers to finance payments of goods and services. Examples include layaway plans, car purchases, personal loans, and online retail.
A popular alternative to installment buying
In the eyes of some, the various protections that credit cards offer make them a safer choice when making big purchases. Of course, credit cards’ high interest rates can make it seem like those protections aren’t worth the cost. Then again, some credit cards that offer 0% introductory rates.
Is it better to buy in installments?
If you don’t have enough money for a purchase or just want to spread out the financial impact, installment financing may be the better option for you.
What is installment with example?
In the context of installment payment plans, an installment is one payment toward the full price of a good or service. For example, one monthly car payment is an installment toward the purchase of your car.
How do installments work?
Installments work through an agreement between a buyer and seller. They agree on the number of installments and the frequency at which the buyer will make these payments, and the total duration of the agreement.
What is an installment in simple words?
An installment is a partial payment of a total cost.
What are the disadvantages of installments?
Disadvantages of installments include the seller’s risk of buyer default and the possibility the buyer will owe interest.
Which is better, cash or installment?
This depends on your unique circumstances and the price of your purchase. If there is no interest on an installment credit, this may be the better option. If you have the cash and can pay less by paying the total upfront, that may be the better option.
View Article Sources
- Consumer Financial Protection Bureau Opens Inquiry into “Buy Now, Pay Later” Credit — Consumer Financial Protection Bureau
- Installment credit — Encyclopedia Britannica
- NCRC Comment Letter On “Buy Now Pay Later” Consumer Finance Products — National Community Reinvestment Coalition
- The Hidden Risks of Buy-Now, Pay-Later Plans — Consumer Reports
- Useful background articles from personal finance and fintech sites — Various
- What is Afterpay and How Does It Work? — SuperMoney
- What Is an Installment Loan? Definition & Examples — SuperMoney
- What Are The Different Types of Credit? — SuperMoney