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Credit Sale
The second method of obtaining instalment credit is slightly less flexible than a charge account in that the period of repayment and the monthly instalment are both fixed at the outset. It is thus what might be called a 'structured loan' in that the structure of the complete transaction is predetermined. The usual name for this arrangement is 'credit sale'. The interest charge is lower than for extended credit under a charge account.
Under a credit sale agreement a purchaser agrees to pay a cash deposit at the time of purchase. The deposit required ranges upwards from 10% depending on the type of goods. For many items the minimum down payment is fixed by law. The customer also agrees to repay the balance plus interest over a selected period of up to three years or so. Interest at a stated percentage flat rate (in 2012 it was commonly 12.5% or 13.5% per annum) of the original debt for the whole of the selected period is added to the debt at the outset. This total is divided by the number of months in the credit period to give the monthly repayment instalment required.
Example
In one transaction a customer agrees to buy several items of furniture.
Total retail price 400
Deposit required 10% 40
Original debt (carried over) 360
Original debt (brought forward) 360
Interest charged at 13.5% per annum over 24 months on
original debt 98
Balance to be paid by 24 monthly instalments of £19.09 458
Total credit price 498
True rate of interest is 26.8% per annum.
Under a credit sale the purchaser becomes the owner of the goods outright as soon as he signs the contract. Should he default on his repayments the whole of the outstanding debt becomes payable and he can be sued for that amount.
Most department stores and some other large retailers now finance their own instalment credit plans, but the majority of smaller distributors arrange the credit through one of the finance companies.
Charge Card
The charge card is the modern equivalent of the old-fashioned monthly credit account. It is now generally called a charging account and is operated by many of the big department stores. In essence the system is very similar to that of Access or Barclaycard. The shop provides the customer with a charge card (after having checked the customer's credit status) and this card can be used in that shop only almost exactly as with Access or Barclaycard. The customer gets about a month's free credit; for extended credit repayable by monthly instalments he pays interest. Rates of interest ranged in 2012 from... see: Charge Card