Installment buying

what is installment buying

Installment buying/installment loans allow people to pay for costly expenses they can’t afford at the moment. Wondering whether these types of purchases are the right option for you? Keep reading to learn more about installment buying and your installment buying plan options. 

What Should I Know About Installment Buying?

An easy-to-understand  installment buying definition is: a financing option available to borrowers that want to make larger purchases. 

A creditor provides upfront money through a loan which the borrower repays in scheduled installment payments. The monthly payment amounts consist of the principal balance and interest fees. The borrower may have to provide a down payment depending on the installment plan. 

There are classic installment buying options such as personal loans whose balances grew 19% to $519.5 billion as of Q3 2022.1 

And there are also newer options like Buy Now Pay Later or (BNPL) which despite their age have gained an enormous amount of popularity and are predicted to continue growing. A new study from Juniper Research has predicted that the number of BNPL users will surpass 900 million globally by 2027; increasing from 360 million in 2022 .2 

What Are Some Other Options?

There are many installment payment plans/ installment credit and buying options to choose from. The best one for you depends on the type of installment purchase you are trying to make and what your budget will look like. 

Keep in mind that repayment terms depend on the installment purchase you make and the creditor.  

These are a few popular installment credit options: 

Auto Loans

Vehicles are expensive purchases, even if you buy a used car over a new car. Buyers often use auto loans, which provide installment payments, to afford the high cost of a new vehicle. 

Interested borrowers can obtain auto loans from:

A lien is typically placed on the certificate of title during the duration of the repayment process. This signifies that the car is the rightful property of the creditor until the total debt amount is settled.

Qualification for one of these installment loan options depends on your credit score and income. 

If you have a bad credit score, you may get an auto loan offer with high rates and that could mean higher installment payments every month. You can apply for a joint auto loan if your credit is bad to take advantage of your spouse’s good credit history, since lenders look into both borrower’s credit scores with a joint auto loan.

Mortgage Loans

Many people use mortgage loans to afford the purchase of real estate, they come in various installment payment plans. Most commercial banks and credit unions provide mortgage loans. 

Qualification for a mortgage loan also depends on your credit score and income.

Before you apply for a mortgage loan, consider if you prefer a fixed-rate loan or a variable-interest loan:

  • A fixed-rate loan means your monthly payments will always be the same, which can make budgeting easier. 
  • A variable interest rate depends entirely on the federal funds rate. Variable rates are a risky option because you can’t predict how much your installment payments will be each month. You may end up saving money or struggling to cover a high payment. 

Student Loans

If you can’t afford the cost of post-secondary education expenses, you can apply to get student loans, installment loan options. This installment option can help students afford tuition, books, electronics, and supplies. Most students use both federal and private student loans to cover the cost of school related expenses. 

Federal student loan eligibility is based on your Expected Family Contribution (EFC), year in school, enrollment status, and cost of attendance. Most students may qualify for private student loans, but eligibility is based on your credit score, income, and enrollment status. 

Private student loans often have higher interest rates, so many students with bad credit refinance their student loans. 

Buy Now, Pay Later Plans (BNPL)

Many major online retailers with mass production work with installment buying creditors to provide payment plans to customers. 

If you can’t afford the cash price of consumer goods online, you can still complete your online purchase by signing up for an installment plan. 

Your total purchase cost with added interest fees (if any) is split into multiple equal payments. This is also known as installment credit or an installment purchase. 

Most buy now, pay later payment options split the total cost into four monthly payments. 

Personal Loans

Personal installment loans allow eligible borrowers to receive a lump sum of money which is repaid in monthly installments. Eligible borrowers use personal loans for personal expenses, such as:

Medical BillsCharges for medical services such as doctor visits, hospital stays, surgeries, medications, and other healthcare needs.
Home Improvement ProjectsRenovations, updates, or additions to a home to enhance its value, function, or aesthetics.
Rent or Mortgage PaymentsRegular payments made by a tenant to a landlord (rent) or by a homeowner to a bank or other financial institution (mortgage).
Car RepairsCosts associated with fixing damages or issues with a vehicle.

Eligibility for a personal loan is based on your income and credit score. Despite low credit, you may still qualify for an installment loan as there are personal installment loans for bad credit, also called bad credit loans.

What Should I Know About Installment Payments?

Installment buying is a great financial option that allows consumers to make smaller payments over a specified period of time. However, it’s essential that you know exactly how much money you will owe when using an installment buying plan. 

Financial institutions love to promote the low affordable monthly payments you can make. Don’t be fooled by the affordability! While your monthly payment may be down, you may end up paying a lot more for the convenience of installments. 

A good step towards being financially responsible is knowing how much you will pay in interest fees. Keep reading to learn how to calculate your annual percentage rate (APR) and monthly payment amount. 

Calculating Your Annual Interest Fee

When you use installment buying options, creditors will inform you of the APR rate. But exactly how much money is the interest payment? Calculate the interest charge to know if financing is worth the amount you will pay in fees, here is how you can do it:

  • Multiply your total financing amount by the APR rate. 

For example, if you apply for a $900 online loan right now and receive a 24% APR rate, you will end up paying $216 in yearly interest fees. If you want to make a costly purchase, consider if you can afford the additional cost of interest fees. 

Calculating the Monthly Payment

Once you calculate how much money you owe in interest fees for the year, you can calculate your monthly payment amount. You will need to divide your yearly interest fee by twelve. 

So from the example above, If you owe $216 for annual financing, you will pay $18 monthly. 

Installment Purchasing FAQs

Here are some answers to commonly asked questions about installment purchases:

What are some advantages and disadvantages of installment buying?

There are definitely some pros and cons of making purchases through installment payments. Advantages include the ability to make large purchases and pay in manageable monthly installments/an installment plan. Disadvantages can include higher overall costs due to interest and the risk of repossession if payments are not made.

How has the practice of installment buying evolved over time?

Generally speaking, installment buying has become more accessible and widespread with the advent of technology and online shopping. It’s now common to see monthly installment payments for a wide range of products and services, not just big-ticket items like cars or homes.

What regulations govern installment buying?

Installment buying is regulated by various federal and state laws that protect consumers. These laws might cover aspects like disclosure of terms, interest rates, and practices for dealing with late or missed payments.

What are some common practices and mistakes in installment buying?

Common practices with installment buying can include calculating annual interest fees and monthly payments. A common mistake might be not fully understanding the terms of the agreement, leading to unexpected costs or difficulties in making payments, as mentioned above.

What’s the difference between installment payments, installment buying, and an installment plan?

These terms are often used interchangeably, but there are subtle differences between them:

Installment payments — This refers to the regular, usually monthly, payments that a borrower agrees to make to repay a loan. An installment payment typically includes a portion of the principal (the original loan amount) and the interest accrued on the principal.

Installment buying — As you now know, this is a method of purchasing in which the buyer takes possession of an item immediately but pays for it in regular installments over a set period of time. 

Installment plan — This is a broader term that refers to any arrangement in which the borrower or buyer agrees to pay back a loan or a purchase in regular installments over a set period of time. An installment plan could be used for installment buying, but it could also be used for other types of loans, like personal loans or student loans.

In essence, installment buying is a type of installment plan, and installment payments are the regular payments made under the terms of an installment plan.

Are there any strategies for successful installment buying?

Yes, there are several strategies that can help ensure successful installment buying:

Budget carefully — Before you commit to an installment plan, make sure the regular payments fit comfortably within your budget. Consider your income and all your regular expenses to ensure you can make the payments without strain.

Understand the terms — Make sure you fully understand the terms of the loan before you commit. This includes the interest rate, the length of the loan, the amount of each payment, and any fees or penalties for late or missed payments.

Pay on time — Making your payments on time is crucial for maintaining your credit score and avoiding late fees. 

Pay off early if possible — If your loan doesn’t have prepayment penalties, consider making extra payments or paying more than the minimum amount due each month. 

Remember, installment buying is a significant financial commitment, and it’s important to approach it with care and consideration.

What are some alternatives to installment buying?

There may definitely be alternatives to installment buying that you can look into. Some alternatives include: 

Saving up to pay in full — This method involves setting aside money over time until you have enough to purchase the item outright. However, it requires discipline and patience, and it may not be feasible for large purchases that are needed immediately.

Renting — This can be a good option for items that are only needed temporarily, or for people who prefer not to commit to owning an item long-term. However, you typically end up paying more than the item’s value over time, and you don’t own the item at the end of the term.

Leasing — Leasing is similar to renting, but it’s typically used for high-value items like cars and houses. Leases often have the option to purchase the item at the end of the term. Like renting, leasing can be more expensive than buying in the long run, but it can also provide more flexibility.

Each of these methods has its own advantages and disadvantages, and the best choice depends on your individual circumstances and needs. It’s important to carefully consider your options and possibly consult with a financial advisor before making a decision.

How does installment buying differ from other forms of credit like credit cards in terms of interest rates?

Here are the differences between installment buying and credit cards in terms of interest rates:

Installment buying — The interest rate for installment loans is typically fixed, which means it won’t change over the life of the loan. The interest rate is often lower than that of credit cards, especially for secured loans like auto loans and mortgages. However, the rate can vary depending on factors like the borrower’s credit score and the length of the loan.

Credit cardsCredit card interest rates are often higher than those of installment loans, especially if the borrower has a lower credit score.

In general, installment buying can be a more cost-effective way to finance large purchases, while credit cards can offer more flexibility for smaller, everyday purchases

What happens if a borrower fails to make payments in an installment buying agreement?

Typically if a borrower fails to make payments, they may face late fees, damage to their credit score, and potentially repossession of the item if it’s a secured loan like a car loan or mortgage.
What Factors Are Generally Included in the Terms of Installment Buying?

The terms of installment buying generally include:

A down payment (sometimes)
A minimum monthly payment
A repayment period
And consequences of non payment/breach of contract

Thoughts From CreditNinja

CreditNinja encourages you to know precisely how much money it costs to use an installment buying plan. Having a clear understanding of your installment buying agreement can help you better manage your finances. You should also know that you have alternatives such as personal loans, to learn more about these or other financing options check out CreditNinja’s blog page. 


  1. The Average Personal Loan Balance Rose 7% in 2022 | Experian
  2. Buy Now Pay Later Users to Reach Over 900 Million Globally by 2027 | Juniper Research
  3. How Aid Is Calculated | Federal Student Aid
  4. What is Installment Buying? | Wise Geek
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