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What is a Payment Plan?

Tricia Christensen
Tricia Christensen
Tricia Christensen
Tricia Christensen

A payment plan is a plan for repaying an outstanding debt. These are used in many different ways. Auto loans and home mortgages usually come with a payment plan that is agreed upon — the borrower pays X amount per month in order to repay the loan. Some payment plans are more flexible, such as those with credit cards, and amounts paid may be based on fluctuating amounts owed.

The payment plan doesn’t always have to be to pay money owed. In certain instances, people will make prepayments on something they wish to purchase prior to receiving it. This type of plan can be common when paying for things like medical or dental care of certain kinds.

Home mortgages usually come with a payment plan.
Home mortgages usually come with a payment plan.

For instance, if a person wants to get cosmetic surgery, they may need to pay in advance for a procedure. If that money can’t be produced immediately, a doctor’s office could set up a pre-pay plan, in which the person takes several months in advance of the surgery to pay for it. Another payment plan that bears similarity to this is a layaway program. Prior to receiving an item, the person pays for it over a set period of time, and that item is held for the person during this time.

Outstanding loans typically offer a payment plan to prevent borrowers from defaulting.
Outstanding loans typically offer a payment plan to prevent borrowers from defaulting.

Under some circumstances, payment plans may be initiated by the person who owes money instead of by the lender. Someone who can’t fully pay their taxes owed might suggest an acceptable amount they will pay to the tax agency per month. If a person has incurred debt with a hospital that is too much to pay at once, they might suggest an amount per month they can pay. This may help stop collections on debts owed, provided the person sticks to the terms they have set for the plan.

Credit card companies may offer customers a payment plan so they can stay on top of spending.
Credit card companies may offer customers a payment plan so they can stay on top of spending.

One use of the term payment plan is common among credit counseling services. These agencies may be able to work with creditors to reduce debt and they can create a repayment schedule that is acceptable to each creditor. This can be particularly helpful for those people with lots of debts and need to find a way to pay them all, but lack the power to negotiate with each debtor for things like reduced interest or lower monthly payments.

Payment plans are part of a layaway program.
Payment plans are part of a layaway program.

Another way in which people may utilize a payment plan is when they make ongoing payments to things like insurance companies or to utility companies. They can set up automatic monthly withdrawals from bank accounts as part of a plan to remain current on new monies charged. For people who forget to pay their bills often, these structured withdrawals may pose an ideal solution, provided enough money is in the account to fulfill the terms of the plan.

Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

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Tricia Christensen
Tricia Christensen

Tricia has a Literature degree from Sonoma State University and has been a frequent SmartCapitalMind contributor for many years. She is especially passionate about reading and writing, although her other interests include medicine, art, film, history, politics, ethics, and religion. Tricia lives in Northern California and is currently working on her first novel.

Learn more...

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Discussion Comments

Sunny27

Oasis11- I also want to note that parents can make installment payments for the tuition along with the room and board and the local fees. These are three separate categories that the parents can prepay.

I signed up both my kids and paid for the four year tuition, one year of room and board and four years of the local fee.

oasis11

I just wanted to add that a payment plan can also involve prepayments for college tuition.

In Florida we have the Prepaid College fund. This fund allows a child to attend a public university of their choice and have the tuition covered by this plan that the parents pay into.

The parents get to lock in today’s tuition price for their child to attend college, but they have to agree to the installment plan.

There is a five year installment plan and a monthly plan. Each month the parents must contribute to this plan in order to remain in good standing with the 529 Board.

Once a parent successfully pays off the plan, they receive a certificate that notes that they paid in full. This is really a terrific payment plan that most Florida residents with children participate in.

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    • Home mortgages usually come with a payment plan.
      By: WavebreakMediaMicro
      Home mortgages usually come with a payment plan.
    • Outstanding loans typically offer a payment plan to prevent borrowers from defaulting.
      By: Gino Santa Maria
      Outstanding loans typically offer a payment plan to prevent borrowers from defaulting.
    • Credit card companies may offer customers a payment plan so they can stay on top of spending.
      By: Sergey Nivens
      Credit card companies may offer customers a payment plan so they can stay on top of spending.
    • Payment plans are part of a layaway program.
      By: pressmaster
      Payment plans are part of a layaway program.
    • Mortgages are an example of installment debt which requires monthly payments.
      By: Brian Jackson
      Mortgages are an example of installment debt which requires monthly payments.
    • Payment plans may be used to pay for dental procedures.
      By: HconQ
      Payment plans may be used to pay for dental procedures.
    • Payment plans can help couples manage their debt better.
      By: WavebreakMediaMicro
      Payment plans can help couples manage their debt better.