Installment purchase
An installment purchase is a special form of credit that makes it easier for the customer to acquire a product immediately. The purchase price of the item is paid to the seller in smaller monthly installments rather than, as is usually the case, in a single sum in cash or by card. The repayment period usually varies depending on the purchase amount, typically between three months and four years. An exception are cars or other high-value purchases that generally cannot be repaid in full in such a short time. In these cases the installment purchase contract often runs over a longer period. Installment purchase is often also referred to as paying by installments or partial payment. Each installment consists of the monthly portion of the partial payment amount, the so-called principal repayment, and any interest and fees the seller may charge for the installment payment. The process, often called a financed purchase in retail, offers great advantages both for customers through the purchase incentive and for the retailer. Installment purchases allow customers to buy a higher-value item, such as a new TV, or a service, such as a package holiday, immediately. The retailer ensures with this purchase incentive that the customer buys the goods from them rather than saving up and possibly buying from another retailer later. In this way both sides benefit from the installment purchase.
Edward Clark introduced the installment purchase
As early as 1856, the American Edward Clark developed the installment plan to enable his customers to acquire one of his practical sewing machines immediately and then pay it off in small, affordable installments. This prototype for installment payment is still used in a similar way today. Usually the same amount is due on the first of each month as repayment for the duration of the contract. Very rarely is an installment purchase merely a payment deferral, where after a waiting period, for example six months, the full purchase amount plus an agreed interest payment is repaid in one sum. Clark and the co-founders of his company introduced the now more common form of installment payment with monthly repayments and thus became pioneers in the field of partial payment. Not only through creating this favorable way to buy a sewing machine could his company already achieve a worldwide market share of eighty percent by 1880. The rules that apply to installment purchases in Germany today are laid down in Section 492 of the German Civil Code (BGB). Among other things, it stipulates that all loan contracts for consumers, which include installment purchases, must be documented at least in written form. Any subsequent amendments to the contract must also generally be made in writing. The customer must also be informed in writing about their statutory cancellation period. Thus, customers in Germany take on no risk when concluding an installment contract, since all aspects are precisely regulated and defined by the legislator. The written form prevents misunderstandings from the outset and the installment purchase can be completed by any customer without problems.
From washing machines and cars to flights
Whether the family needs a new washing machine, a dryer or another appliance important for a functioning household is irrelevant for installment purchases — nearly every appliance is now offered with the option of installment purchase. Interest rates for installment purchases are often much lower than for a comparable installment loan from a financial institution. Especially for the latest multimedia devices, such as LCD TVs or tablet PCs, installment payments without interest and fees are frequently offered. The customer then only has to pay the actual cash price, which is simply divided into the agreed number of installments. These favorable or free installment payment agreements make it possible for customers to acquire a device immediately that they might otherwise have to save for over a long period. For families in particular, buying the example washing machine has thus become very easy. But installment payments are not limited to appliances and furniture — they also apply to cars, motorcycles, motorhomes or even an entire trip.
Low or even no interest rate
For consumers, the prevailing competition is very advantageous. Almost every retail company now offers installment purchases to enable customers to acquire goods immediately. Interest rates are generally low; the seller's profit lies mainly in higher sales volume. Overdraft interest rates on a conventional current account are almost always significantly higher than the interest rates for an installment purchase. Therefore, it is worth checking for the option to pay in installments for any purchase. For the retailer, the installment purchase is a good business primarily because of the increased turnover. At certain times of the year, various retailers even offer completely interest-free installment purchases for different products. This way you can buy a TV or a car at low cost. In such cases customers are not charged any interest for their installment purchase. In the vast majority of cases, the retailer does not even charge fees for concluding these interest-free installment contracts, as a credit institution would typically do. Therefore, even if you might have the purchase sum available, it's worth checking with the retailer whether a product you want is currently offered with an interest-free installment purchase. Customers who have invested their money well and perhaps receive relatively high fixed interest rates can sometimes even gain financially by buying on installments.