Installment Buying in the 1920s: Buy Now, Pay Later
Installment buying was the financial innovation that made the Roaring Twenties possible. In 1920 most middle-class families paid cash for everything except a house. By 1929, more than 60 percent of furniture, 80 percent of automobiles, and 75 percent of radios were bought on the installment plan. Total consumer installment debt grew from about $1 billion in 1919 to more than $7 billion by 1929. The plan’s collapse during the Great Depression helped make the downturn the worst in American history. For the broader transformation, see our guide to consumer culture in the 1920s.
The Origins of Installment Buying
The installment plan was not new. The Singer Sewing Machine Company had sold its machines on installment from the 1850s, when the typical American family could not afford the $100 price tag in cash. The piano industry had used installment plans since the late nineteenth century. The International Correspondence Schools had enrolled millions of students on installment contracts. The Encyclopedia Britannica had been sold door-to-door on installment since the 1890s.
What was new in the 1920s was the scale. The General Motors Acceptance Corporation (GMAC), founded in 1919, was the first major industrial finance company to make installment loans for automobiles. Within a few years, GMAC was financing more than half of all GM cars sold. Chrysler followed with the CCF Credit Corporation in 1923. Ford established the Universal Credit Corporation in 1928. By 1929, the installment plan was being used to sell washing machines, refrigerators, vacuum cleaners, phonographs, radios, and even life insurance. To see the broader credit landscape,
The Mechanics of the Plan
The installment plan was simple. The buyer made a down payment of about 10 to 25 percent of the purchase price. The seller — or, increasingly, a finance company that bought the contract from the seller — financed the balance. The buyer paid off the loan in monthly installments over 12 to 24 months, with interest. The seller retained title to the item until the final payment; if the buyer missed a payment, the seller could repossess the goods.
The interest rate on an installment loan was typically 11 to 22 percent per year — far higher than the 5 to 6 percent prevailing on home mortgages. The “carrying charge” — interest plus service fees — typically added 5 to 10 percent to the cash price of a good. The high cost of installment credit was, in part, a reflection of the high cost of administering small loans; it was also a reflection of the risks involved. Many installment buyers were working-class families with no prior credit history, and default rates were high.
The Appeal of the Plan
The installment plan succeeded because it solved a fundamental problem of the 1920s consumer economy. Mass production had made durable goods — cars, washing machines, radios — available and affordable. Most middle-class families, however, did not have the savings to pay for them in cash. The installment plan allowed families to acquire the goods immediately, paying for them out of future income.
The plan was based on what economists of the era called “income psychology” — the assumption, almost universal in the late 1920s, that wages would continue to rise. The model worked as long as incomes grew. By 1929, an estimated 1.5 million middle-class families were making installment payments on cars, and an even larger number was making payments on furniture, appliances, and radios. For the parallel transformation in the products themselves,
The Statistics of the Boom
The numbers are striking. By 1929, according to the National Bureau of Economic Research, installment credit financed more than 60 percent of furniture sales, 80 percent of automobile sales, 75 percent of radio sales, 65 percent of washing machine sales, 50 percent of phonograph sales, and 20 percent of jewelry sales. Total consumer installment debt grew from about $1 billion in 1919 to $7 billion by 1929. The increase in installment debt accounted for about a quarter of the total increase in consumer spending during the decade.
The plan’s success depended on continued economic growth. As long as wages rose and unemployment stayed low, installment buyers could keep up with their payments. The plan’s structural weakness, however, was that the entire system depended on continued income growth. When the economy contracted, installment payments became impossible.
The Legislative Response
Installment buying was controversial from the start. Critics called it a form of debt slavery, denounced the high interest rates, and warned of the systemic risk. Reformers proposed state laws to cap interest rates, regulate finance companies, and protect installment buyers from predatory practices.
The first response was the Uniform Small Loan Law, drafted by the Russell Sage Foundation in 1906 and revised in 1916. The law set maximum interest rates of about 3.5 percent per month on small loans — a rate still considered high by modern standards, but lower than the rates charged by many unregulated “salary buyers.” By 1929, more than half of the states had adopted some version of the law. New York State passed comprehensive credit reform laws in 1927. The legislative response, however, was uneven and incomplete. Many installment plans were still governed only by the terms of the contract itself. ## The Collapse of the 1930s
The installment plan’s collapse during the Great Depression was swift and devastating. As unemployment rose in 1930 and 1931, installment buyers fell behind on their payments. Finance companies repossessed cars, washing machines, and furniture. The repossessions flooded the second-hand market, depressing the prices of new goods and creating a vicious cycle of declining demand and rising unemployment. The Federal Reserve estimated that the volume of installment credit outstanding fell by more than half between 1929 and 1932. The collapse of consumer credit was, in the view of many historians, the single most important channel by which the 1929 stock market crash became the worst depression in American history. For the broader cause,
The Long-Term Legacy
The installment plan survived the Great Depression, the World War II rationing, and the postwar consumer boom. By 1950, the total volume of consumer installment credit had recovered to its 1929 level, and it would grow steadily for the rest of the twentieth century. The Federal Reserve began publishing regular reports on consumer credit in the 1940s, and the Truth in Lending Act of 1968 brought installment contracts under federal regulation. The credit card — the Diners Club card of 1950, the BankAmericard of 1958, the MasterCard and Visa networks of the 1960s — was, in essence, the installment plan reborn for the postwar middle class. For the daily-life context,