When buying on credit using an installment plan, you are protected by law when a "security agreement" or contract is provided by the seller and signed. The agreement contains the terms of the sale, including interest and service charges, and the actual cost of the purchased goods and other charges.

If buying a big-ticket item, such as a car, the seller may wish to receive payment immediately rather than wait for installment payments. The merchandiser then sells the contract to a bank or finance company.

A promissory note, a statement whereby you promise to make the required payments to the holder of the note, is then attached to or made part of the contract. You are required to sign both documents and make the payments as indicated to the bank or finance company.

There are several additional things you should know about buying on credit:

• Repossession: If you sign a contract and fail to make the payments as set forth in the contract, the seller or issuer of the loan may sue you to protect his or her interest. Often, the seller will attempt to repossess the item sold. You will receive written notice of the seller's intention to repossess. However, you may prevent repossession by paying, in full, what you owe before the date of repossession. Once the item is repossessed and you fail to make the payment of the balance due, the seller may resell the goods and credit the money received from the resale to what you owe on the contract. If the goods are sold for more than what you owe, you get the extra money back. However, if the difference is less than what you owe, you may have to pay the difference.
• Defective goods: If the merchandise you purchased is defective, you should notify the seller and lender, both verbally and in writing, about the need to replace the item or fix the defect. Until the problem is resolved, you have the right to withhold payment on a contract and/or promissory note. However, defects do not release you legally from the sales contract or promissory note, but they do give you a defense if the seller tries to sue for nonpayment. In Illinois, the laws pertaining to purchases of cars differentiate somewhat from the purchase of other merchandise. For more information, consult your lawyer.
• "As is" merchandise: Ordinarily, if you accept an item "as is," you forfeit any claim against the seller. So, if you purchase a car "as is," no warranty takes effect.
• Door-to-door sales: The law provides that you may cancel a contract within three days in instances where the sale was in your home and unsolicited. You must follow the proper notice procedure for the cancellation, however, and return any goods received to the seller.
• Limits on finance charges: In Illinois, there is a limit to the finance charges, which may be added to the price of goods purchased on an installment plan. The finance charge must be disclosed on the face of your contract. Any charge in excess of the limit is illegal, and the contract may be canceled at your option. A lawyer can provide you with information about the limit on finances and can provide the advice you need to keep you from entering into an unfavorable contract.

Note: This information was prepared as a public service by the Illinois State Bar Association and is a joint project with the Illinois Press Association. Its purpose is to inform citizens of their legal rights and obligations.