What is a credit sale? Features and conditions
In a credit sale the buyer gets the goods now and pays later. In a cash sale the buyer pays in full at once.
Features
- Goods are handed over first; money comes later.
- Payment is often in instalments: a down payment now plus EMIs (equated monthly instalments).
- Usually interest or fees, so the total cost is higher than the cash price.
- Forms: store credit, credit cards, consumer loans through a finance partner, hire purchase, buy-now-pay-later.
Common conditions
- Minimum age and valid ID and address proof.
- Proof of steady income.
- Fixed tenure, due dates and late-payment fees.
- In hire purchase the shop owns the goods until the last instalment.
Why shops offer credit
More sales and loyal customers. The risks are bad debts (money never paid), cost of collection and tied-up money.
Credit checks and authorisation
A credit check is a look at the buyer's ability and willingness to repay. Shops often use a credit bureau report and a credit score.
The 5 Cs of credit
- Character: past repayment record, honesty.
- Capacity: income left after expenses and existing EMIs.
- Capital: savings and assets.
- Collateral: anything pledged as security.
- Conditions: job stability, purpose, interest rates, the economy.
Authorisation means the shop or lender formally approves the credit and the limit. For card payments the card network sends an authorisation code that confirms the card is valid and has enough limit.
Processing a credit request
- Application: the customer fills a form (name, contact, job, income, product, amount).
- Documents: ID, address proof, income proof, bank details; the sales associate checks they are complete and match.
- Credit check: bureau report and 5 Cs.
- Decision: approve, approve a smaller amount or a bigger down payment, or decline politely with the reason.
- Agreement: the customer reads and signs the terms (price, interest, EMI, dates, penalties).
- Delivery and follow-up: goods handed over; reminders before due dates; records kept safely and privately.
Judging creditworthiness
Creditworthiness is how likely a person is to repay on time. Signs of a good borrower:
- A good credit score and no missed payments in the past.
- Steady job or business income.
- Low existing debt: a common rule is that all EMIs together stay under about 40% of monthly income.
- Some savings for emergencies.
- Complete, honest documents.
Warning signs: many recent loan applications, frequent job changes, missed payments, documents that do not match.
Worked check
Income 30 000 a month; existing EMI 6 000; new EMI 5 000. Total EMI = 11 000. Share = 11 000 ÷ 30 000 ≈ 37%. Under 40%, so capacity looks fine.
Try it: the 3D and at home
In the last 3D step, set income and EMIs and predict the decision before you look. At home: find a product advert with an EMI offer. Multiply EMI × months, add the down payment and compare with the cash price. How much extra is the credit costing?
Key formulas and definitions
- Total credit price = down payment + (EMI × number of months).
- Cost of credit = total credit price − cash price.
- EMI share of income = total EMIs ÷ monthly income × 100%.
- 5 Cs: character, capacity, capital, collateral, conditions.
- Process: application → documents → credit check → authorise/decline → agreement → delivery.
Worked examples
1. A phone costs 18 000 cash. On credit: 3 000 down and 6 EMIs of 2 700. Find the total credit price and the cost of credit.
Total = 3 000 + 6 × 2 700 = 3 000 + 16 200 = 19 200. Cost of credit = 19 200 − 18 000 = 1 200.
2. Income 40 000 a month, existing EMIs 12 000, new EMI asked 6 000. Using the 40% rule, should it be approved?
Total EMIs = 18 000. Share = 18 000 ÷ 40 000 = 45%. Above 40%, so decline or ask for a bigger down payment to cut the EMI to 4 000 or less (16 000 ÷ 40 000 = 40%).
3. A customer has a high salary but has missed four card payments this year. Which C is weak?
Character (repayment history). Capacity is good, but past behaviour shows risk, so the lender may decline or give a small limit.
Common mistakes
- Thinking 'pay later' means 'pay the same'. Interest and fees usually make the total higher.
- Looking only at income. Existing EMIs and repayment history matter as much.
- Skipping document checks to close a sale quickly; mismatched documents are a fraud warning.
- Confusing authorisation with delivery. Goods should be handed over only after approval and a signed agreement.