Installment Debt
Categories: Credit
When we borrow twenty bucks from our sister, chances are good that, when we pay her back (if we pay her back), we’ll probably give her the whole twenty we owe her all at once. We’re not going to give her five dollars a month for the next four months, because uh...why would we do that? It would be much easier to just slip her a nice, crisp Andrew Jackson and take care of the debt all at once.
But when we borrow big sums of money, like for a house or a car or a college education, we do the exact opposite. Those loans are usually way too large to be paid off all at once, unless we find ourselves in some kind of financial windfall-type situation. These are “installment debts”: debts we assume knowing that we’ll pay them back in installments instead of one lump sum.
The good news about installment debts is that we don’t have to come up with a huge pile of money—like, say, $350,000 for that house we just bought—all at once. The less good news is that we’re going to end up paying more than $350,000 when we make installments, because we’re also going to be paying stuff like loan fees and interest on the principal amount.
But hey, at least we get to live in the house—and decorate it with all of our DC Comics action figures, assuming we aren't married—while we pay down the loan.
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Finance: What is Installment Method?0 Views
Finance a la shmoop what is an installment method? okay well first let's
start with a question what's an installment? basically it's a
way of buying things really wanted those silver plated golf clubs that guaranteed [Golf ball on a tee and golf club appears]
to make you play like Tiger when he was good you know the young Tiger not the
new whining Tiger who can't break par... well those golf clubs cost thirteen
hundred bucks ouch don't have the dough don't even have the [Man with empty jean pockets]
credit just put it on the Amex well you probably want to get some financial
therapy over your spending habits but if you can get past that well then you can [Man laying on couch in financial therapy]
likely by the clubs by paying in installments
so you'd pay say a hundred bucks each month for thirteen months and boom the
clubs are bought and paid for okay so now let's think about how this purchase
gets accounted for on the books of the guy who just sold you those clubs well [Balance sheet appears]
in this case have you simply agreed to pay for the clubs with money payable
three months later well it would have shown up on the sellers books as an
account receivable right like he was to receive money from you ninety days later
in this case however you are paying off the clubs for thirteen lucky weeks in [Accounts receivable sheet for installment payments]
which you install your payment in one thirteenth segment one hundred bucks
each right so on the books of the seller as each week goes by he collects his
hundred bucks from you and were this straight accounts receivable the number
would simply decline to twelve hundred dollars and eleven hundred dollars, then a
grand and so on well the key accounting difference here
is that when applying an accounts receivable style tracking system the
revenue is recognized all upfront and the value of the account receivable
declines in one-thirteenth parts until it's fully depreciated to zero. In the
installment method however the key difference is that revenues are not
recognized until the cash actually shows up in the bank of the golf club seller
right so really the two accounting methods are about as different as young [Man discussing accounting methods and young Tiger Woods appears]
Tiger and new Tiger and isn't he eligible for the Senior Tour yet?