The History of Installment Buying

State of Payments | 7 mins

If you dig through historical archives of retail stores from 95 years ago, you’ll find a popular trend that impacted how consumers thought about big-ticket purchases: installment buying.

Today’s concept of installment buying has become a staple for retailers looking to attract new customers, increase purchase volume, and boost brand loyalty. Of course, any payment model can have some flaws in its infancy. Installment buying is no exception, but it has evolved thanks to a specialized and restrained approach offered by modern online retail financing solutions.

To understand how retail and modern payment models have evolved over the past century, it’s worth taking a deeper dive into the history of installment buying. This historical perspective provides key insights into what motivates consumers to make a purchase, and what characteristics of installment buying play a pivotal role in today’s online payment experience. Given the addition of an advanced online financing infrastructure, the modern version of installment buying has carved a niche for retailers to offer shoppers a simplified payment method without the level of risk that used to exist.

The Early Days of Installment Buying

Research indicates that in 1925 shoppers made an estimated $5 billion worth of installment payments (adjusted for inflation). One out of seven dollars spent at a shop was connected to an installment buying plan. This concept took off like wildfire before a system could fully be established to safeguard these loans. This meant that because these early installment loans were being offered while any sort of credit rating or collection apparatuses were still in their infancy, large numbers of shoppers were able to take out loans they were unable to pay back. The rise in popularity in the 1920s of installment buying, coupled with the 1929 stock market crash that led to the Great Depression, showed the flaws of offering a payment model before it was fully ready.

The flaws of installment buying programs of the 1920s point more to an unrefined payment model in its infancy than to the underlying concept itself. The Federal Reserve had only been around for a little over a decade, and a majority of commercial banks weren’t even part of the Federal Reserve’s system yet. The economic problem had less to do with retailers embracing installment buying, and more to do with an underregulated and underdeveloped financial system.

The advent of mass production led to the rise in popularity and affordability of new consumer goods such as cars, household appliances, homes, and furniture among a growing middle class, paving the way for the rise of installment buying. In the ‘20s, the automobile industry was heating up and a new standard of life was within reach, whether consumers could afford it or not. The retail and advertising industries were ripe for innovation and saw a new outlet to connect with consumers hungry to buy into the new purchase model. Installment buying became standard for everything from luxuries to necessities, with manufacturers pushing retailers to offer installment plans. Shoppers took installment plans whether they wanted them or not, or whether they could pay.

The same motivators are at play today, with targeted ads and digital-first, one-click shopping motivating consumers rather than mass media advertising. However, installment buying is now regulated and fully accounted for, as well as much less common than it was in the Roaring ‘20s—when 13% of retail sales were made in installments, compared to less than 1% today. Retailers now have access to innovative online financing technology to offer safer and more personalized pay-over-time solutions for customers.

How Installment Buying Trends Have Evolved Over Time

When the 1920s-era shopper wanted to pay for their new couch with installment payments, there weren’t a whole lot of options. An agreement was made with a shop owner to make regular payments. This simple, basic concept didn’t have a lot of terms, and left little room to account for if the shopper stopped making payments. A century later, these gaps have been fully addressed by stronger financial regulations, advanced credit reporting and risk modeling, and a more mature online retail financing market that vets the installment buying process for the retailer.

Credit cards didn’t hit the market until the 1950s, 30 years after installment plans rose in popularity, and had their share of problems with rising, hidden interest rates and complex terms. The lack of innovation in the credit payment market in the decades since credit cards were introduced is proving to be neither friendly toward consumers nor retailers. This is how the classic installment buying concept paved the way for a more regulated, organized payment system that fit the needs of everyone: ecommerce point-of-sale financing.

At Bread, for example, we partner with retailers so consumers can make purchases with installment payments that have clearly defined rates and an easy-to-use interface. Shoppers know what each month’s payment (including any interest) would be for the duration of their loan before they buy. The terms are easy to understand and transparent, alleviating the fears about compounded interest or prepayment penalties. Installment payments with a modern pay-over-time premise provides shoppers with the simplicity of making a payment in the 1920s, with the ease of making a quick online payment on their terms. This is a win-win scenario for the shopper and the retailer.

Today’s Overview of Installment Buying for Online Retailers

In 2020, consumers’ appetite for paying for big-ticket items with installment payments continues to grow when they feel empowered with how they choose to pay for that item. One industry survey indicates that 35% of shoppers said they are more likely to make a purchase if a business offers monthly installment payments, and our nationwide research indicates 74% of shoppers say they would shop more at stores that offered interest-free installments. That same research indicates big-ticket shoppers would buy an item if installments were available than if the product was recommended by a friend.

Installment buying isn’t just geared toward shoppers who can’t afford an item; many simply prefer to not make larger purchases all at once, as they like the security of being able to balance their larger expenses over time. Providing shoppers with installment buying options provides them with greater purchasing power to fully understand their payment options and more flexible options that work for their lifestyle, which increases the chance they’ll convert at checkout.

Online retailers are adopting installment payment options to increase chances of conversion and boost average order volume. Flexible financing options like installment loans provide consumers a transparent, straightforward view of the purchase. This experience gives the shopper the confidence to complete the purchase because the power remains in their hands. The retailer gets the added benefit of a satisfied customer who is more likely to become a repeat shopper.

By empowering consumers with the option to pay for purchases through low installments over time, chances for engagement and conversion increase. Introducing financing through an installment buying option as part of the shopping journey allows ecommerce merchants to empower customers to convert with more flexible payment options, growing long-term revenue and brand value.