Installment sales and credit sales are quite similar. Each is a form of credit that provides a way for goods to be delivered and the payment for the goods to be deferred to a later date. However, there are two key differences between installment and credit sales: time to repay and collateral. While a credit sale is a short-term payment deferral option, an installment sale is generally stretched over many years. Collateral refers to the type of assets used to secure the credit.
Credit Sales vs. Installment Sales
Credit sales are a way that businesses can offer customers a payment deferral option for a short period of time. The typical time frame for a credit sale is 90 days or less. Oftentimes, a discount is given on a credit sale if full payment is received within a specified number of days.
- Installment sales and credit sales are types of credit arrangements that defer payments for goods to a later date.
- The two key differences between installment and credits sales are the duration the credit is offered and the collateral used to back the credit.
- Credit sales are typically of shorter duration and installment sales spread payments out over longer periods of time.
- When a car dealer offers installment agreements to customers, the car is used as collateral for the credit.
- A mortgage loan is another example of installment debt.
Credit sales are very common in the business world and dominate company-to-company transactions. Many companies use a combination of cash and credit sales and investors often try to distinguish between the two types in order to determine a firm's percentage of credit sales.
Installment sales also allow deferred payment, but there are no discounts for early payment. Installment sales encompass much longer time periods compared to credit sales. In addition, the seller maintains an ownership interest in the goods sold until the balance due is received in full. That is, the goods serve as collateral for the credit.
Examples of Credit and Installment Sales
If a company purchases inventory from a manufacturer in a credit sale with a 5/10 net 30 term, this means the company has 30 days to make the full payment; however, if payment is received within 10 days, the customer receives a 5 percent discount. A credit sale is also final, and ownership of the goods is transferred at the point of sale. There is no lingering interest in the goods or product from the seller.
When a buyer finances a purchase with an installment agreement, they are assuming installment debt. For example, few homebuyers can afford a home purchase with a single payment. Therefore, the cost of the home is amortized with monthly payments over 15 or 30-year payment schedules.
Car sales are another example. If a car is purchased from a dealer under a retail sales installment contract, the buyer makes payments on the vehicle directly to the dealer. The customer also names the dealer as an interested party on the title, so it is held for collateral. If the customer stops making payments, the dealer can repossess the vehicle as immediate payment.