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What is an Installment Plan?

By Felicia Dye
Updated Jan 22, 2024
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An installment plan is a payment option. It allows a debtor to fulfill a financial obligation by making small payments over an extended period of time. In some cases, people become indebted knowing that they will use installment plans. Other people use this payment method because they unknowingly accrue debt that exceeds what they are able to pay. In most cases, doing so results in a larger bill.

Installment, when used in a financial sense, is a word that means payment. This is why an installment plan is often referred to as a payment plan. There are some instances when people go into debt knowing that an installment plan will be used for settlement. For example, a person may order an item that is advertised as being available for six monthly payments.

In other cases, satisfying debt by way of payments is necessary because a person accrues debt and then realizes that he or she cannot pay it. A good example of this is an American tax bill. The Internal Revenue Service (IRS) may conduct an audit and find that a person has not paid sufficient income tax. Since many people are unable to pay such bills in full, the IRS has a monthly installment program that allows individuals to settle their obligations over time.

This type of debt settlement option is referred to as a plan because it is usually very structured. The amount of each installment is usually set. Generally, the number of payments that need to be made is determined by the amount of time that the creditor will allow the bill to be outstanding. This allows for the determination of how much each payment should be. For example, if a creditor will allow five months for the settlement of a $100 US Dollars (USD) debt, then the installments should be $20 each.

The day of the month that the payment should be remitted is usually set. The manner in which the payment is made is also commonly predetermined. Sometimes an installment plan is only presented as an option when there is a source from which the payments can be directly drawn, such as a credit card or bank account.

Financial advisers often discourage these types of arrangements when they can be avoided, because they tend to require additional expense. One element that commonly adds cost to an installment plan is interest. This is a fee, generally expressed as a percentage, that may be added when people obtain credit. Some bills that are repaid by an installment plan are also subject to penalties. These are fees designed to punish an individual for not paying on time.

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