What Are the Differences Between Installment Sales and Credit Sales?

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What Are the Differences Between Installment Sales and Credit Sales?

Credit sales and installment sales are quite similar. Each is a kind of credit that allows things to be provided while payment for the commodities is delayed at a later date. However, there are two major distinctions between installment and credit sales: repayment duration and collateral. A credit sale is a short-term payment deferral option, while an installment sale is often spread out over several years. The term collateral refers to the assets needed to obtain loans.

Credit Sales vs. Installment Sales

Credit sales allow firms to give clients a payment delay option for a limited time. A credit sale is often completed in 90 days or fewer. A credit sale is often discounted if full payment is paid within a certain number of days.

Key Takeaways

  • Installment sales and credit sales are both sorts of credit agreements that postpone payments for items until a later date.
  • The period of the credit and the collateral used to support the credit are the two fundamental distinctions between installment and credit sales.
  • Credit sales are normally for a shorter length of time, while installment sales stretch payments over a longer period of time.
  • When a vehicle dealer offers consumers installment agreements, the automobile serves as security for the financing.
  • Another example of installment debt is a home loan.

Credit sales are quite widespread in business and account for the majority of company-to-company transactions. Many businesses employ a mix of cash and credit sales, and investors often attempt to differentiate between the two in order to estimate a company’s credit sales percentage.

Installment sales also allow for delayed payment, however there are no early payment incentives. Installment sales cover far longer time periods than credit purchases. Furthermore, the seller retains possession of the things sold until the amount owing is paid in full. In other words, the commodities act as collateral for the credit.

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Examples of Credit and Installment Sales

If a corporation buys merchandise from a manufacturer on credit with a 5/10 net 30 term, it has 30 days to pay in full; however, if payment is made within 10 days, the client obtains a 5% discount. A credit sale is likewise final, and ownership is transferred at the time of sale. The vendor has no residual interest in the products or product.

When a buyer uses an installment agreement to finance a purchase, they are acquiring installment debt. Few homeowners, for example, can afford to make a single mortgage payment. As a result, the cost of the property is amortized over 15 or 30-year payment schedules with monthly installments.

Another example is car sales. When a car is acquired from a dealer using a retail sales installment contract, the buyer pays payments to the dealer directly. The client also designates the dealer on the title as an interested party, so it is retained as collateral. If the consumer fails to make payments, the dealer has the right to repossess the car as immediate payment.

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