Michigan Collections Manager License Practice Test

What must installment sales contracts specify regarding collateral?

1. They must explain the payment method

2. They must state any collateral involved

3. They must detail buyer's credit history

4. They must disclose total purchase price

The correct answer is: They must state any collateral involved

When it comes to installment sales contracts, it is essential that they clearly articulate any collateral involved in the transaction. This requirement serves several important purposes. First, specifying collateral helps define the security that the seller has over the property or item being sold. It assures the buyer that the seller has a legitimate interest in the asset, which they can claim if the buyer defaults on the payment terms of the contract. Furthermore, stating any collateral in the contract creates transparency for both parties. The buyer understands what they are putting at risk should they fail to meet their obligations under the contract. This can foster a sense of responsibility on the part of the buyer and create clarity about the seller’s rights and remedies in case of default. While factors like the payment method, the buyer's credit history, and the total purchase price are also important elements of an installment sales contract, they do not carry the same level of necessity for specification of collateral as stipulated by law and standard practice in such agreements. Since collateral involves the tangible security for the loan or payment being made, its specification is a fundamental aspect of the contract that protects both buyers and sellers.