Today, the use of credit to purchase many of life’s necessities and pleasures alike is quite common and accepted. However, it hasn’t always been this way. The use of an installment plan to purchase goods really became popular in America during the 1920s.
Prior to the 1920s, most goods were bought outright with cash. People saved their money over time until an expensive item could be purchased. An installment plan allowed a consumer to pay a small amount right away and then to pay smaller increments on a specific schedule for a set period of time until the product was completely paid for. By the end of the decade, people could buy everything from a refrigerator to an automobile on an installment plan. However, to participate in such a plan, the buyer usually had to pay interest on the money still owed or a service fee for the option. Simply stated, buying something on the installment plan required the buyer to pay a larger amount but in smaller portions over time.
For example, say someone bought a new car at the price of $550 in 1927. Choosing to use an installment plan, the buyer paid $100 right away and agreed to pay the remaining $450 at 8% interest over the course of one year.
Interest = 450 x .08 x 1
This means the buyer paid $36 dollars in interest; $486 dollars paid in 12 monthly payments of $40.50 was much easier to handle on a 1920's salary.
Today, installment plans have been replaced by the credit card to a large extent. Credit cards, unlike installment plans, can be used almost anywhere and are funded by large banks. However, the charge for borrowing money on a credit card is usually based on compounded interest rates, and smaller minimum payments are encouraged. Based on the example above, if you borrowed $450 on a credit card charging 8% interest and made the recommended minimum monthly payment of 5% of the balance, it would take you 40 months to completely pay off the balance. In addition, you would pay over $53 in interest.
The installment plan became the method of choice for many Americans who wanted to live comfortable lives with modern conveniences at hand. Instead of having to pay for it all immediately, they could have new products right away and pay for them slowly. This new way of buying and paying boosted spending considerably and changed how businesses and households operated across America.
