Sale in payments

economic-dictionary

The installment sale is a type of transaction where the seller allows the customer to cancel the product in several future payments. These subscriptions are often called installments.

In other words, installment sales allow you to extend the payment for a good or service for a period that can last months or years.

The objective of installment sales is to give the consumer the comfort of being able to cancel a product in parts, and not in a single disbursement that could be very high.

Durable goods, such as a property, or expensive services, such as a trip abroad, are usually sold under this modality.

In addition, the installment sale is usually made by credit card, so the customer normally acquires a debt with a financial institution. This is granting you a loan that you must repay in several future installments (installments).

Another point to take into account is that each installment has two components: the principal of a loan (the part of the amount of the debt that is amortized) and the interest (financial cost for buying on credit).

In the same way, we must mention that in some cases it is required in period 0 of making the sale the payment of an initial fee, which is a part of the price of the product, for example, 10%. This happens, for example, in the case of real estate.

Advantages and disadvantages of installment sales

Among the advantages of installment sales we have:

  • Increases the commercial movement of the seller, as the good or service becomes more accessible.
  • It allows the customer to purchase expensive products or services without going undercapitalized in the short term.
  • Many times it is the only way in which a person can access an expensive asset such as a home.
  • There are tools that reduce risk. The entity that finances the operation could demand as collateral the property traded itself, as is the case with real estate. Then, in case of default, the bank takes possession of the house and can sell it to recover the loan granted.

However, installment sales also have disadvantages:

  • There is always a percentage of clients who will not comply with canceling their debt. This is known as credit risk.
  • It can dangerously incentivize consumerism in a certain sector of the population that is vulnerable to default, for example, if you lose your job.
  • Taking into account the two previous points, the financial institution must properly manage the approval of credits (and the interest rates imposed), as well as the collection management of its client portfolio. Otherwise, the business could become unsustainable.
  • Higher financial costs are generated for the customer. This, because, as we mentioned earlier, each installment includes interest. That is, not only is the sale amount distributed among the number of periods, but there is an additional cost for the value of money over time.
  • The client feels satisfaction at the moment, but in the future we must take into account that he will have to bear the responsibility of canceling a debt, which can generate stress and an eventual conflict with the creditor.

Installment sale and interest

As we have already mentioned, this method of payment usually involves the charge of interest. These will depend on the interest rate which, in turn, is determined based on the level of credit risk.

This means that the interest rate will be higher the higher the probability of default. This is defined based on different variables such as the debtor's credit history and the credit period (the shorter the financing term, the greater the possibility of repayment and vice versa).

Tags:  Spain accounting USA 

Interesting Articles

add
close

Popular Posts

economic-dictionary

Mixed recruitment

right

Curate it

economic-dictionary

Political economy

economic-dictionary

Reduced VAT