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For business purposes, an installment is a periodic payment. Installment debt is a loan which requires payments at regular intervals, usually monthly, for a set time period. Installment loans can be used for both secured and unsecured debt.
Installment debt is a popular method of purchasing big ticket consumer goods. It could be difficult for many people to buy vehicles, appliances, and other large ticket items if they had to pay cash. For an expensive purchase, the buyer may be required to make an initial investment, called a down payment. This payment is often larger than the subsequent periodic obligations. The advantage of using installment financing is that the buyer is able to begin using the product immediately, instead of waiting until he can afford to make a cash purchase.
Another advantage of purchasing through installment debt is that a buyer can frequently obtain a lower interest rate than he would if buying with a credit card. Unlike credit cards, an installment payment stays the same, and the buyer has a definite date when the debt will be paid in full. Credit cards, on the other hand, lower the minimum monthly payment as the balance decreases and a debt can take years to retire. Also, credit card companies frequently increase interest rates if a payment is ever late. With an installment loan, there is no acceleration of interest.
There are also advantages to businesses utilizing installment debt to finance the purchase of their merchandise. The most obvious is an increase the number of potential buyers. Businesses that finance their own products also benefit from the interest collected. In addition, the seller maintains ownership in the property until the amount is paid in full. If the buyer stops making payments, or defaults, then the owner can repossess, or reclaim the property, and the buyer forfeits all payments.
Installment loans used to purchase personal property are called secured loans. There are some financial institutions, however, that are willing to make unsecured personal loans using an installment plan. The interest rates charged for this type of installment debt is usually higher, since the lender is at greater risk. If a borrower defaults on an unsecured loan, the lender has no property to repossess.
Once an installment debt has been paid, the lender is required to release his ownership claim in the property. For example, an automobile that is financed has the name of the lender on the title. Once the vehicle is paid for, the lender is required to provide a release to the borrower so that a new title can be issued. Who files the release, either borrower or lender, varies between jurisdictions.
Having an installment loan can also help an individual establish credit. One factor considered by credit reporting agencies when calculating credit scores is how many types of debt a consumer has utilized. If a person has made timely payments on both a credit card and installment debt, he will receive a higher score than if he his only obligations have been revolving credit.
While it is good to be cautious before entering into any loan agreement, an installment debt may be a good option. Handled properly, it is a way to acquire a large ticket item through budgeted payments. The lower interest rate and set term can be an attractive alternative to large credit card purchases.
In my experience, interest rates on installment debts can be lower than credit card debt, but they can still be quite high depending on an individual's credit rating. Unfortunately, interest rates vary widely from one person to another, so it may be wise to meet with a lender for a credit consultation before assuming you'll qualify for a loan at a lower interest rate.
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