A Brief Introduction About the Installment Agreement
To understand an installment agreement, let’s first understand what installment is. What does installment mean? An installment is made in parts over the period. So, an installment contract is a legally binding document that makes provisions for the same. For example, monthly installment loans, EMIs for buying products online, etc. So an installment contract is a purchase agreement where provisions for an installment are made on specified dates.
In the United States, the agreement is the name given to an IRS program that lets citizens pay their taxes as monthly payments. There are types of these agreements viz, streamlined, partial, guaranteed, and full payment. Each deal has a set of conditions to be fulfilled.
Here are some examples of an agreement of the installment:
- A contract entered into for the sale of a flat or land.
- Contracts for the purchase of goods online by a consumer whose payment is made in monthly installments.
- Contracts for the sale of vehicles.
- A contract for maintenance of computers or other electronic appliances.
Who Takes the Installment Agreement?
The agreement is taken by a person or a company who wants to buy a product or a service, but cannot or does not want to pay the whole amount as a lump sum and a company or an individual who is willing to let the first party make scheduled payments, at a decided rate of interest. It can also be entered between a party who is willing to deliver goods/services at recurring dates and a consumer. The installment can be in the form of money or goods/services.
Purpose of the Installment Agreement
The primary purpose of the agreement is for the benefit of the customer or the person making the payment. A person may not have a large sum of money in one go, but making provisions for the person to be able to make the payment in parts through an installment plan makes it easier. Also, it can help the companies or goods and service providers to deliver their products in a recurring manner. What is an installment plan? It is a set of agreed terms determining the dates of payment/delivery, the frequency of the payment/delivery, the period of payment/delivery, the interest percentage, and the mode of payment/delivery.
The agreement is more flexible than a mortgage agreement as it can be entered into by people who don’t qualify for a mortgage. When a real estate buyer and seller enter into such an agreement, it can also be called a land contract, contract for deed, or articles of agreement for warranty deed. Such a contract does not give the title to the buyer immediately. Only after all installments are made, the title is transferred to the buyer’s name.
However, the buyer can take possession of the date of signing the agreement. Its purpose in the field of real estate is to give security to the seller and to create a quicker mechanism for sellers to recover their property than mortgage foreclosures.
Contents of the Installment Agreement
The installment contract must contain:
- Name and contact details of all the parties.
- Amount of consideration for which the installments are being created.
- Start and end date of the agreement, which will also be the dates of the first and the last installment.
- The interest rate for the installment.
- Frequency of the payment and the mode of payment.
- The conditions are governing default, late payment, and breach of contract, including the amount of interest that will be charged in case of default of payment.
Points to Consider While Preparing the Installment Agreement
- Find a template on the internet to refer to while drafting.
- Add a title to the document.
- Identify the parties to the agreement and list their details.
- Write down the total consideration amount, the consideration and mode of payment of each installment, the payment schedule, and the rate of interest applicable.
- Include the end date of the agreement by which all the payments will be paid.
- Include the consequences of the breach of the installment agreement.
- Include a clause to govern the conditions of early payment or pre-payment.
- Mention when does a ‘default’ occur, e.g., when a person fails to make a payment for x number of days after the date of installment, etc.
- Mention a ‘grace period’ for the payment or delivery of goods/services and the charges for late payment.
- Include a clause to mention the governing law.
- Include a clause to mention the place and method of dispute resolution. Also, mention who will bear the costs of legal disputes.
When it comes to an installment agreement, the question of installment fee or the rate of interest for making payments in a series arises. Here is where parties can negotiate and create a win-win situation. Almost all the terms of the contract can be negotiated in case of installment contracts, and this is why negotiations play an important role when it comes to installment agreements.
Benefits and Drawbacks of the Installment Agreement
Advantages of using the agreement:
- Creates a mechanism for mode, date, amount of legally binding payments.
- It gives a person the chance to make part payments instead of a lump sum, reducing financial burden.
- Allows the goods and service providers to have long-term customers through cyclical deliveries.
- It is legally enforceable as it is a proof of transaction.
- Awards protection to the person receiving the payments.
- It works like a guarantee for payments in the future.
- It serves as a good record in case of disputes in the future.
- As the payments are made for a long period, the sellers have a tax advantage.
- Drafting the contract can involve legal fees.
- The debtor ends up paying more than the original amount due to interests, penalties(1), etc.
- Even though a guarantee of payment is made, it can be breached despite the contract.
- Breach of contract can start an expensive legal battle.
- Failure of payment can lead to seizure of assets, even the personal ones.
What Happens in Case of a Violation?
When an installment agreement is violated, the non-breaching party is entitled to damages as it is a breach of contract. For example, a person may fail to make the installment payment(2) when a standing instruction has not been set in the installment account at the bank. A reference check is mandatory to ensure if a provision of a ‘grace period’ is added in the agreement. The grace period here infers more time to the party to make the payment in case of a breach. If that has passed, a legal claim for damages can be made.
Sometimes, the person can be awarded damages for only the installment that was breached while the other times, when it is clear that future breaches are likely, damages are awarded that would cover the future installments.
An agreement of installment is a common agreement found in various industries, online and offline. It is useful to reduce the financial burden on a person who cannot pay a huge amount in a lump sum and for companies to get recurring business from their clients, to enable them to deliver goods and services repeatedly.
However, does the installment agreement extend statute limitations? No, it does not. The period of limitation to enforce debt collection remains the same according to the governing law of the contract. If a creditor fails to collect his debts and the statute of limitations runs out, despite the installment agreement, no claim can be made in the courts of law.
Extreme caution must be exercised while drafting the agreement. One of the essential terms of the contract is the consequences in case of ‘default’ or breach. This must be drafted in the agreement. It is advised to hire a legal attorney to draft the agreement. One can also refer to agreement templates available on the internet.