Conditional and Installment Sales

In an ordinary buy and sell situation, the buyer owns the items he or she purchases and takes home. The purchase price of some items, however, is paid out over time to the seller, although the buyer is in possession of the goods. These transactions are called conditional or installment sales. For example, the buyer may have possession of the plasma screen TV he or she bought, but he or she does not own it if he or she is paying out installments toward the purchase price to the store where it was purchased.

Sidebar: An installment sale is not the same as charging a purchase on a credit card. There, the bank issuing the credit card pays the store the full purchase price of the plasma screen TV on your behalf. Since you are not paying out the purchase price to the seller directly, there is no installment sale.

Sidebar: State laws typically regulate installment sales.

If you are the seller, you legally own, or have title, to the item that is the subject of an installment sales contract. Under the contract, the seller is the creditor and the buyer is the debtor. If the buyer does not make his or her payments, the seller has the right to:

• retake the item and cancel the contract;
• retake the item, sell it, apply the proceeds to the amount owed under the contract and sue the buyer for the remainder; or
• sue the buyer for the total unpaid balance.

TIP: If the seller prevails in court, he or she will recover the balance on the installment sales contract, interest on the balance for the entire time it was owed plus attorney's fees.

Sidebar: A "sale on approval" allows the buyer to return the item if he or she chooses not to accept it after trying it out. The buyer does not own the item until he or she accepts it. For example, a copy machine delivered to an office to buy on approval is not paid for by the buyer until he or she accepts its condition and notifies the seller within a reasonable time.

Unlike installment sales contracts, which are generally regulated by state laws, rent-to-own agreements are often excluded from regulation. The weekly payments may be modest, but the interest rate charged can exceed 200 percent, making the final cost far beyond the original purchase price. Late payments can result in penalty fees and repossession of the item.

Never enter into a rent-to-own agreement without obtaining the following:

• a complete list of all fees;
• an explanation of penalties for late payments;
• the interest rate; and
• the total sales price of the item if the agreement is paid out.

I purchased a dining room set on installment and lost it in a fire. Do I have to keep paying for it?

Yes. You must continue making the monthly payments; the dining room set was not returned-it was destroyed-and you must pay for it.

TIP: Always take out insurance on items purchased on an installment plan. Typically, homeowner's insurance covers furnishings, but if you are renting, get renter's insurance. The proceeds you receive will allow you to pay off the purchase.

The amount I am paying off on a hot tub I purchased is more than the sales price. Why did the amount increase?

You are being charged interest and fees on the transaction. The seller is obligated to provide you with an itemized list of interest charges and other fees. Ask for one immediately so you can understand the transaction.

Sidebar: The seller is also required to provide you with a statement showing payments you made that have been credited to the purchase amount.

TIP: Stores, particularly electronics stores, sell high-priced items (computers, wide-screen TVs, appliances, etc.) with "no payments or interest for 6 months" and other gimmicks. Do not purchase the item if you cannot make the payment due at the end of the time period (or an even number of payments to pay off the purchase during the no-interest period). If you miss the deadline, interest and other fees will be assessed-as much as 21 percent.

I missed a couple of payments on a computer purchase I was paying out and have now been billed for the entire amount left owing. Why can I not continue to make monthly payments as before?

You defaulted on the purchase contract. Nearly all retail installment contracts (which is what you signed) provide that in the event of default the "entire unpaid balance of the total of payments" becomes immediately due and payable.

TIP: When you buy an item at a store on an installment basis, a bank rather than the store itself finances the purchase. For instance, you do not owe the electronics store for the computer-you owe the bank that financed the transaction that is listed on the installment contract you signed.

I sold my friend some jewelry I owned for $2,000, and she is buying it on installments. Do I need to put our agreement in writing?

Yes. Without a written agreement of some kind, the deal you made with your friend may be unenforceable, and you could be left without the money or the jewelry.

Your agreement should:

• identify the jewelry;
• set out the purchase price;
• set out the amount of the installment payments;
• list the dates the payments are due;
• give you the right to have the jewelry returned if payments are missed;
• permit you to refund payments if the jewelry must be returned; and
• give you the right to demand the entire purchase price if a payment is missed.

If you put the agreement in writing, laws make it much easier for you to collect the money she owes you in the case of default.

Sidebar: It is common for retail installment contracts to contain arbitration clauses prohibiting the buyer from a filing a lawsuit based on the contract. Additionally, the buyer waives the right to a jury. You will not be able to litigate any dispute concerning the purchase in a court.