Deferred payment

There are a number of ways in which you can defer a payment for a product or service. Deferred payments are those where payment occurs at a future date, even if the physical transaction may take place instantaneously.

Loans

A loan is an agreement, usually made between a consumer and a financial institution, where the consumer borrows an amount of money that they do not yet have. The institution, usually a bank or credit union, must ensure that the consumer has the ability to pay back the amount borrowed - either by checking their earning capacity or enlisting a guarantor, that is, a person to guarantee that someone will repay the loan.

Generally, you would apply for a loan if you wanted to purchase something that would be too expensive to pay for upfront, such as a car or a house. In addition to checking your ability to pay back the amount you borrow (the principal), the lending institution would also charge interest, a percentage of the amount, to compensate for the money they do not have during the time it takes you to pay back the loan. Your ability to pay back a loan limits the amount of money you can borrow. You repay the loan in arranged installments that cover both the interest and part of the principal.

The main advantage of a loan is that it allows you to purchase something that you cannot afford yet. If you are taking out a loan to buy a house, for example, it means that you can live in the house as you pay off the loan instead of renting while trying to save for a house.

There are a number of drawbacks to large loans, however. The first is that because you pay interest on top of the principal, you will eventually pay more for the item than its initial price. It can also take a long time to clear the loan debt - several years, or even decades, depending on how much you borrow. Lastly, if you cannot clear your debt, then the lending institution may exercise their right to repossess (reclaim) the item in order to recover the outstanding money.

Credit Cards

Credit cards allow you to take out small loans with financial institutions, usually banks or credit card companies, on the premise that you pay back a minimum amount every cycle, a period determined by the institution (usually a month). A credit card contains information about the holder including their name and account number, as well as the issuing institution. Credit transactions are confirmed with the holder's signature.

A credit limit is the maximum amount you can borrow at any one time, determined by the amount of money the credit institution believes you can pay back in the cycle. Credit cards also charge interest on any money you owe at the end of the cycle.

The major benefit of a credit card is that, like a loan, you can purchase something that you may not be able to afford yet, on a smaller scale. Credit cards are also the main form of payment for online transactions where the confirmation comes via a verification number rather than a signature.

Unfortunately the interest rate on a credit card is usually far higher than that on a loan and, if you cannot manage your money, you could find yourself paying a great deal more for the item than its initial price. There is also the potential for fraud if someone steals your card, particularly with online transactions.

Lay-by

Lay-by is a type of loan where the vendor withholds the item until you pay it off. This usually occurs on site at the place of sale, if the business has the facilities to store your chosen item. You pay a deposit to reserve the item and then the business will give you a due date to pay the remainder. When you pay the remainder, you can take the item.

This type of deferred payment does not generally charge interest, but you cannot take possession of the item until you have paid for it in full. If you default on (do not pay) the remainder, then you lose your deposit and your hold on the item. You would choose this method of payment if the item is likely to sell before you have enough money to pay for it by other means, but you cannot afford it at the time of sale. The main disadvantage of lay-by is that you do not get the benefit from having the item immediately.