The vast majority of automobiles sold in the United States are sold on a time payment plan, and this method is becoming more and more popular, being applied to the purchase of mobile homes, boats and even appliances. The purchaser does not pay cash. In most auto sales, the purchaser trades in his present car as a down payment and the balance is financed over a period of months, sometimes as long as four years or even longer.
The alternative method of payment is, of course, cash, and early in the history of the automobile industry cars were sold only for cash. The trouble with a cash payment requirement for a car is that few people can pay out $4,000 all at once.
The question immediately arises as to why a person does not save up his $4,000 first and then when he has accumulated it buy his car, and not until then. The theory is good, but in practice most people cannot accumulate such a sum. Other things come along to attract buyers and they yield to the desire of the moment with the result that away go their savings.
When a person is required by contract to pay (and this payment really amounts to saving) he generally pays. The alternative is the loss of his car and all of the savings that went into the car. The theory behind time sales is, in addition to the part described above, "Pay as you use the car." Your time payments roughly cover how much of the car's value disappears over a period of months and years. Of course the payments must exceed this depreciation in value or else in the event the buyer does not make his payments and defaults to the finance company or bank, the value left on the car, which the finance company seizes, is less than the amount owed by the purchaser, and therefore the finance company loses.
Besides automobiles, most of which are sold on the time payment plan, almost all mobile homes (house trailers) are sold on the same plan. In the past five years more and more pleasure boats have been sold in this way, and all sorts of appliances are sold on the same plan: washing machines, driers, air conditioners, vacuum cleaners and television sets.
Each year more items are added to the time payment plan group. One of the more recent is air travel. This service is most certainly the exception to the rule that you pay as you use it. When air travel is used up it is really used up and you, the purchaser, have to pay for something that has long since disappeared.
There is really little difference between conditional sales contracts and chattel mortgages as far as the purpose of these legal instruments is concerned. They are both designed to provide security to the investor to enforce his demands for payments (and the payments are made in strict accordance with the contract entered into freely by the purchaser) and to enable the investor to take over the auto or other object financed in case the buyer defaults on his payments.
The conditional sales contract is just what it says it is: a contract of sale which is dependent on the fulfilling of certain conditions on the part of the buyer, namely that he complete all of his payments, whereupon the title to the auto or other object financed passes to him. It does not pass to him until this time. The investor owns the auto, and if he owns it, it is not a very difficult legal procedure for him to take away from the purchaser that which belongs not to the purchaser, but to him.
The chattel mortgage is an obligation on the part of the purchaser to pay the investor. If the purchaser does not meet his payments, the investor must go through the approximate same legal proceedings as in the cases of mortgages on real property, which procedure has already been discussed in connection with mortgages.
People must enter into these contracts with care, knowing that they will be able to make the payments each month for the duration of the mortgage. Before making a large purchase of a new car or boat, it is advisable to make a budget and see where you will be financially in six months or a year. Without careful consideration, people can get in over their heads with finance companies and end up losing more than just the item they purchased.