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Installment sales and credit sales are quite similar. Each is a form of credit that allows the goods to be delivered and payment for the goods to be deferred to a later date. However, there are two essential differences between an installment sale and a credit sale: the repayment period and the guarantee. While a credit sale is a short-term deferral of payment option, an installment sale is usually spread over many years. Collateral refers to the type of assets used to secure credit.
Credit sales and installment sales
Credit sales are a way for businesses to offer customers an option to defer payment for a short period of time. The typical time frame for a credit sale is 90 days or less. Often a discount is given on a credit sale if full payment is received within a certain number of days.
Key points to remember
- Installment sales and credit sales are types of credit agreements that defer payments for goods to a later date.
- The two main differences between installment sales and credit sales are the length of time the credit is offered and the collateral used to secure the credit.
- Credit sales tend to be of shorter duration, and installment sales spread payments over longer periods.
- When a car dealership offers installment agreements to customers, the car is used as collateral for credit.
- Another example of installment debt is a mortgage.
Credit sales are very common in the business world and dominate business-to-business transactions. Many businesses use a combination of cash and credit sales, and investors often try to distinguish between the two types to determine a company’s percentage of credit sales.
Installment sales also allow deferred payment, but there is no early payment discount. Installment sales encompass much longer periods than credit sales. In addition, the seller retains ownership of the goods sold until full collection of the balance due. That is, the goods serve as collateral for credit.
Examples of credit and installment sales
If a business purchases inventory from a manufacturer on a credit sale with a net term of 30 of 5/10, that means the business has 30 days to make full payment; however, if payment is received within 10 days, the customer receives a 5% discount. A sale on credit is also final and title to the goods passes to the point of sale. There is no continuing interest in the Seller’s goods or product.
When a buyer finances a purchase with an installment agreement, they assume an installment debt. For example, few buyers can afford to buy a home in one payment. Therefore, the cost of the house is amortized with monthly payments over payment schedules of 15 or 30 years.
Another example is car sales. If a car is purchased from a dealership under an installment retail contract, the buyer makes payments on the vehicle directly to the dealership. The customer also names the reseller as an interested party in the title, so he is held as collateral. If the customer stops paying, the dealership can repossess the vehicle for immediate payment.
