Definition of installment financing

A term you encounter very often today is installment financing. In general, this refers to an agreement, i.e. a contract, concluded between a buyer and a seller. The amount to be paid is then repaid in specified partial payments. These can either be equal installments or, less commonly, a fixed period within which the entire sum must be repaid. This is also called a purchase on credit instead of installment financing. To secure the creditor, interest is also paid on the repayment installments, which is set in the contract in advance.

Why use installment financing?

Installment financing is especially important when you must make an unforeseen purchase at short notice and currently don't have the money available. That means the necessary liquidity is not available. This can be the case, for example, if the washing machine has stopped working or the car needed to get to work is no longer usable. Then a new car or a new appliance must be purchased. If there is not enough money, an installment financing agreement can sometimes be concluded directly through the retailer. This makes an immediate purchase possible. Installment financing is also possible through a lender. However, it is worth performing an interest comparison, as retailers often even offer interest-free installment financing.

What should you pay attention to with installment financing?

Whereas the old rule of thumb used to be that you should only afford what you have the money for, today things are made very easy for the customer, and the actual financial circumstances are often pushed into the background because you do not have to pay cash immediately. Although you usually have to include the applicable interest in an installment financing plan, in long-term planning this can be used for sensible and important investments. Before taking out installment financing, you should therefore be clear about how much you have available monthly so that you can actually service the installments until the end.

What does a contract for installment financing include?

Every contract for installment financing contains information regarding the contracting parties, the item being purchased, and the purchase price. It also specifies how long the term of the installment financing is and how high the installments to be paid are. If agreed, the contract also contains provisions on the agreed interest rate. In addition, every contract includes a right of withdrawal. This means you have a cooling-off period of two weeks. During this period you can cancel the contract. Either you return the goods directly to the seller or you notify them in writing, preferably by registered mail. This gives you the opportunity to calmly consider at home whether the purchase is really necessary. This right of withdrawal is always contractually specified and the customer must be informed of it when purchasing the goods. If the seller failed to do so, the buyer can object to the purchase up to one year afterwards.

Concluding a contract for installment financing

If you want to conclude an installment financing agreement, the lender requires some information. A self-disclosure is also a good way to find out for yourself how many expenses and how much income you have per month. You must also include proof of earnings and, in some cases, the latest account statements. Not to be forgotten is the signed contract. Whether it is really your own signature is verified in a PostIdent procedure. After successful verification by the lender, you receive all documents back, including the contract, and the money is paid out immediately. In advance, you should already have determined how much money you can spare each month to service the interest and principal installments. It is important to consider whether there might already be other obligations that could reduce the applicant’s creditworthiness. Based on this information, you can then estimate what the maximum monthly installments may be in order to remain financially flexible.

What types of installment financing are there?

The installment purchase is calculated from the purchase price to be financed. In addition there are the retailer’s or lending company's processing fees, and then the interest. This total loan amount must then be repaid by the customer in specified monthly installments. The first and last installment can differ slightly from the others so that the total sums up evenly. The longer the term, the lower the monthly burden. However, the installments must then also be paid for a longer period. Many retailers also offer installment financing, for example very frequently at furniture or car dealers. In the best case you get what is called a zero-percent financing, which means you only pay the financed total amount. The request can still be submitted at the retailer and within a very short time you receive an answer as to whether the loan has been approved or not. The last variant is installment financing via a credit card. Especially for online shopping, a credit card is often required today. Many credit institutions therefore offer the option of repaying the issued amount in a single payment or in partial payments, which usually amount to 10 percent of the approved limit. These installments are then debited from the account every month until the full amount has been repaid. For a larger purchase, however, you must expect a repayment in the lower percentage range of the sum. In any case, installment financing is a convenient way to make a purchase quickly when the necessary cash is not currently available. However, you should inform yourself well in advance and think carefully about the purchase so that you do not get into a situation where you can no longer service the installments and the loan is consequently even terminated.