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What is an Installment Contract?

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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 11 November 2016
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An installment contract is a contract in which one party fulfills the contract with a series of installments, rather than being obligated to perform immediately. A simple and common example of an installment contract is a car loan. One party gets to possess and use the car, in exchange for making payments with interest on a regular basis. When the contract is fulfilled, the party who is using the car is given the title by the other party to the contract.

Installment contracts can be used for many types of business deals. In addition to payments, the party performing in installments could also provide services or goods. For example, a coffee roasting company could agree to deliver set amounts of coffee every two weeks as part of an installment contract with a cafe. Likewise, a computer technician might offer regular service visits in accordance with a service contract with an office.

When one party breaches an installment contract, the other party can sue for nonperformance on the basis of the part of the contract which remains unfulfilled. In the car loan example, if someone is two years into a three year loan and stops making payments, the lender can sue for the entire unpaid balance, not just the single missed payment, under the assumption that the borrower intends to default on the loan. Likewise, once a party has breached an installment contract by failing to deliver on an installment, the other party can terminate the contract without penalties.

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There are some inherent dangers to an installment contract, since such contracts often involve one party performing and then waiting for the other party to follow through on their part of the deal. In a contract for deed with land, for example, the person who owns the land allows the buyer to use it while the buyer is paying for it. If the buyer stops paying, the buyer will still be on the land. Thus, such contracts are structured to provide people with options in the event that the other party breaches. With a contract for deed, for example, the buyer does not have the legal title to the land until the contract is fulfilled, even if she or he has the right to use the land. Likewise, the seller can also repossess the land for nonpayment.

When one enters into a deal which involves an installment contract the contract should be carefully examined to make sure that the terms are understood. If there is confusion, there appears to be an error, or one of the terms is not satisfactory, this should be addressed before the contract is signed. Since contracts can be filled with legal jargon, it is helpful to have a lawyer review a contract before signing it, to avoid a situation in which one becomes locked into an unfavorable contract.

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