Installment contracts are agreements in which payments, performance of services, or the delivery of goods are made in a series instead of all at once. Payments, performances, or deliveries are typically made on specified dates, as outlined in the contract. These types of contracts are common in home and vehicle sales.

Common Examples of Installment Contracts

Installments contracts are commonly used in the following: 

  • Vehicle sales 
  • Sale of land plots 
  • Technology or computer services, which need regular updating 
  • Agricultural goods or produce sales, which are subject to seasonal cycles 
  • Retail installment contracts, where wholesalers sell “in season” or “in-style” clothes to a seller

There are other circumstances that may call for the use of installment contracts. It's important to make the contract language explicitly clear, with specific details outlining how deliveries will work and how payments will be made.

About Installment Contracts

An installment contract may also be known as one of the following when entered into between a real estate buyer and seller: 

  • Articles of agreement for warranty deed 
  • Land contract 
  • Contract for deed  

When the contract is executed, the buyer immediately assumes possession, but the seller keeps the title to the property until the buyer pays the full price.  When the buyer makes the final payment, the seller then delivers the deed.

These contracts are very beneficial in real estate transactions, and they're an alternative to traditional mortgage financing. Consumers benefit if they don't have enough money to make a one-time, lump sum payment. Sellers benefit when their goods or services can only be sold or distributed based on seasonal or cyclical schedules.

When used in real estate transactions, the installment contract acts a security device, although it lacks many of the buyer protections and formalities commonly found in mortgage laws.

A forfeiture clause is common in many installment contracts. This clause protects the seller if the buyer defaults on the contract. In case of default, a seller can terminate the contract and regain the property. It also allows the seller to keep all payments made by the buyer. 

In comparison to mortgage foreclosure, sellers are able to recover their property more quickly under this clause since they don't have to do any of the following: 

  • File a court case 
  • Observe notice and redemption rights 
  • Sell the property 

To make these rights clear, the right of forfeiture has to be clearly provided for in the contract. Otherwise, the court will not enforce forfeiture.

When drafting the contract, sellers should make sure to include a “time-is-of-essence clause." The seller shouldn't accept late payments in order to prevent waiver of the clause.

Under an installment contract, buyers have less protection than that offered with a traditional mortgage. This is due to forfeiture provisions, which can be harsh on buyers who commit even a slight breach of contract. Because inequitable results are very possible due to these clauses, courts tend to look negatively upon them. 

Pros of Installment Contracts

Having more flexibility and fewer formalities are two advantages both sellers and buyers benefit from. 

For sellers, one benefit comes in the form of a tax advantage from receiving payments over an extended period of time. Sellers also aren't bound by mortgage foreclosure laws if buyers default. Sellers may be more willing to sell to buyers who don't meet a traditional lender's qualifications since they know that in the event of buyer default, they can recover their property quickly and at a lower cost than the process of foreclosure.

Buyers like installment contracts because they usually have a smaller down payment and lower closing costs.

As with any other type of contract, it's important to be very specific about the terms and conditions in an installment contract. While these contracts have advantages for sellers and buyers, they may have some drawbacks, too. You'll have to carefully consider the language in any forfeiture clause, as well as its enforceability. 

It's worth enlisting the services of a professional skilled in contract law, especially one who's familiar with the industry you wish to draft a contract for. You'll also have to adhere to any state guidelines, as these may differ depending on your location. 

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