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Updated January 30, 2023 Reviewed by Reviewed by Erika RasureErika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.
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 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.
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.
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.