Installment Buying, Selling, and Financing
INSTALLMENT BUYING, SELLING, AND FINANCING
INSTALLMENT BUYING, SELLING, AND FINANCING refers to the use of short-and intermediate-term credit to finance the purchase of goods and services for personal consumption, scheduled to be repaid in two or more installments. Statistics supplied by the board of governors of the Federal Reserve System show the amounts of credit extended and outstanding to finance automobiles, mobile homes, and other consumer goods. Data on home repair and modernization loans and personal loans reflect the use of cash installment loans to acquire consumer goods and services.
The origin of installment sales credit lies in the open-book credit provided consumers by retailers in colonial times. Although there were no formally scheduled payments, business proprietors expected consumers to pay when funds were available. In agricultural areas, this arrangement meant that retailers extended credit from crop to crop. In 1807 the furniture firm of Cowperthwaite and Sons first introduced consumer installment selling. In about 1850, the Singer Sewing Machine Company began to sell its products on the installment plan. After the Civil War, manufacturers of pianos, organs, encyclopedias, and stoves were quick to broaden their markets by providing for installment payments.
The single largest component of consumer installment credit is automobile credit. Installment financing of consumers' automobile purchases began in 1910.Sales finance companies formed to purchase the installment notes of consumers from automobile dealers. In 1915 the Guarantee Securities Company began buying consumers' installment notes from Willys-Overland dealers. Other firms that entered the field were the Commercial Credit Company of Baltimore, the Commercial Investment Trust of New York, and the National Bond and Investment Company of Chicago. By the end of 1917 as many as twenty-five companies were financing automobiles. By 1925 this number swelled to a peak of about 1,700.After 1930, commercial banks became active in financing automobiles and gradually came to dominate the market. In the mid-1970s the major automobile sales finance companies were factory-owned subsidiaries: General Motors Acceptance Corporation, Ford Motor Credit Company, and Chrysler Financial Corporation. Commercial banks held about 60 percent of outstanding automobile installment credit; finance companies, 25 percent; and other financial lenders, principally credit unions, 15 percent.
The development of installment selling was an accompaniment to, and prerequisite of, the growth of the mass production of a variety of consumer durable goods, of which the automobile was the most significant. As they gained experience, firms providing installment credit gradually lowered required down payments and lengthened the maturities of contracts, thus making credit available to more and more consumers. In 1924 the National Association of Finance Companies adopted standards of a minimum down payment of one-third of the cash price for a new car and two-fifths for a used car, with a maximum maturity of twelve months for both classes. By 1937 maturities had generally lengthened to eighteen months and by 1952 to twenty-four months on new cars. During 1955, a further lengthening to thirty-six months fostered a rapid growth in new-car sales, and in the early 1970s, some contracts allowed for repayment over forty-two and even forty-eight months. By 2002, sixty-month loan periods were common in the auto industry, as higher car prices made it necessary to extend repayment periods.
In addition to longer payment terms, a new finance option became available that made cars more affordable. Called "leasing," consumers essentially "rented" a car from a dealer, as they paid only for the portion of the car that they used over a set period of time, usually twenty-four or thirty-six months. At the end of the lease, the car was returned to the automobile dealer instead of becoming the property of the lease-holder, as there was still a large amount of the car's purchase price that remained unpaid. The consumer then had an option to purchase the leased vehicle (for a price that represented the unpaid amount of the car's value after the lease had been paid), which meant that a new sales repayment contract was negotiated, or they could simply walk away from the deal and choose to lease or purchase a new vehicle from that or another dealer. First popular in the early 1990s, the Better Business Bureau estimated that leasing would account for 33 percent of new car sales in the year 2002.
By the end of the 1920s, retailers other than automobile dealers offered two primary types of credit plan: the thirty-day charge account and the installment account that a specific purchase generated and secured. Buyers seldom paid the thirty-day account in thirty days. In 1938, to provide customers more extended terms on a formal basis, Wanamaker's of Philadelphia introduced the first revolving credit plan for soft goods. Although the permitted payment period was four months, no charge accrued for the use of the credit service. After World War II, as restrictions on all forms of installment credit disappeared, the modern revolving charge account emerged as a credit arrangement that enabled a consumer to buy from time to time, charging purchases against an open line of credit, and to repay at least from one-tenth to one-sixth of the unpaid balance outstanding at the end of a billing cycle. Credit users pay some portion of the cost of providing this service through a monthly charge ranging from 1 to 1.5 percent of a specified unpaid balance.
A later innovation in credit selling was the development of bank charge credit plans, first inaugurated in 1951 by the Franklin National Bank of New York. A plastic credit card issued by a bank provided participating retailers with evidence that the bank has granted the consumer a line of credit. After making a sale, the retailer deposited the sales slip with the bank and receives a credit to his or her account, less a discount from the face of the sales slip. The bank then billed the consumer monthly for his or her accumulated purchases on the credit card. As in the case of retail revolving credit, if the consumer pays within a specified grace period, there is no finance charge. After that point the finance charge levied monthly parallels that assessed by retailers. In the early 2000s, the use of credit cards had reached almost epidemic proportions in the United States. Nearly every person in the country had at least one card, and credit companies had started targeting younger and younger consumers, usually those of college age. Interest rates also became much higher—as high as the mid-20 percent range—as more and more people overextended and defaulted on their credit card debt.
An increasing amount of state and federal legislation has governed consumer installment credit. At the state level, in 1968 the National Conference of Commissioners of Uniform State Laws introduced the Uniform Consumer Credit Code to replace existing segmented state laws affecting consumer credit. At the federal level the Consumer Credit Protection (or Truth-in-Lending) Act (1969) required disclosure of finance charges as annual percentage rates. In 1974 other federal legislation significantly affecting consumer credit came into effect. The Fair Credit Billing Act protects consumers against inaccurate and unfair credit billing and credit card practices. The purpose of the Equal Credit Opportunity Act is to require credit grantors to make credit equally available to all creditworthy customers, regardless of sex or marital status.
"BBB Warns Consumers That Auto Leasing Isn't for Everyone." Better Business Bureau Serving Metropolitan New York. Available from http://www.newyork.bbb.org/alerts/buying.html.
Guttmann, Robert. How Credit-Money Shapes the Economy: The United States in a Global System. Armonk, NY: M.E. Sharpe, 1994.
Mandell, Lewis. The Credit Card Industry: A History. Boston: Twayne, 1990.
Ommer, Rosemary E., ed. Merchant Credit and Labour Strategies in Historical Perspective. Fredericton, New Brunswick, Canada: Acadiensis Press, 1990.
Schor, Juliet B. The Overspent American: Upscaling, Downshifting, and the New Consumer. New York: Basic Books, 1998.
Robert W.Johnson/a. e.