Installment contract

What is an installment contract?

An installment contract is a purchase agreement in which the buyer agrees to make a series of payments on specified dates in exchange for goods or services. Failure to make payments opens the buyer to penalties or legal action by the seller or service provider.

Deeper definition

Installment contracts were once a popular way to buy homes. They were called “land contracts” because they were used for the purchase of land. The contract was between the landowner and the buyer. As mortgage-loan requirements eased in the 1980s, land contracts became less common. They have become more popular, however, since the mortgage meltdown of 2007-2009. Installment contracts also are used for the purchase of motor vehicles and other big-ticket items.

One key benefit of an installment contract is that it’s more flexible than a mortgage and may be available to buyers who can’t get mortgages. Other key features:

• The title for the property remains in the seller’s name until the contract is satisfied.
• The seller can reclaim the property in the event of a default without compensation for the buyer and without a court order.

Installment contract example

Harold plans to buy a small farm from a colleague. Because he lost his home and job during the economic downturn, he cannot qualify for a mortgage, even though he has a good job now. Harry arranges to purchase the farm using a land contact. The purchase price is $600,000. He puts down $100,000 and agrees to make monthly installments over a 10-year period at an annual interest rate of 6 percent. Because he’s confident he will be able to obtain a mortgage at the end of the contract, he agrees to make a final balloon payment of $200,000. This reduces his monthly installments.

Do you have an installment contract? Use Bankrate’s amortization schedule calculator to figure out how much principal you’ve paid and what you still owe on the contract.