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The Evolution of Installment Buying

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedApr 20222 min read

While “buy now, pay later” apps are increasingly popular, installment financing has existed in numerous forms throughout the years. The concept of spreading a large purchase out over a series of smaller payments is nothing new – but its format has changed with the growth of technology. Here’s how installment buying has evolved over the decades, from the meticulously written ledgers of door-to-door encyclopedia sellers to today’s installment apps like Klarna and Afterpay.

What is installment buying?

First things first: what is installment buying and how does it work? The installment buying definition has changed very little. This term refers to the use of short-term credit to finance specific goods or services. It spreads the cost of a purchase out over a series of two or more installment payments. Big-ticket items like cars and electronics are typically sold using an installment plan.

The company extends short-term credit to the consumer with terms and conditions attached. These set out the amount and timing of each installment payment, along with the penalties for breaking the agreement. Some installment plans are offered directly from the seller, while others use a third-party lender.

The history of buying on credit

Installment payment plans have been around since the colonial era in one form or another, but they really took off during the 1920s. At this time, installment buying was rather rudimentary. Consumers would make an agreement with a shop owner to pay the full cost of a new sofa, automobile, or cleaning product with smaller, regular payments. Of course, these early examples of installment payment plans came with more risk attached than today. The Federal Reserve was still new, and most commercial banks hadn’t yet joined the system. If the customer stopped making payments, there was little recourse for the business. Today, we have strong financial regulations and credit reporting.

The next major milestone in the history of buying on credit is when credit cards emerged. The first credit cards were issued in the post-war boom of the 1950s, allowing consumers to enter installment payment plans with a linked-up account. The development of installment financing and mass consumer credit accompanies the growth of mass production, particularly in the new car industry.

Installment financing today

Today, we have far more protections in place both for consumers and businesses entering any credit agreement. Online payment processing also makes it easier than ever for businesses to offer an installment financing plan to customers.

While it’s not the only type of installment loan out there, buy now pay later plans have taken off as a short-term point-of-sale option. These usually require a single upfront payment at the point of sale, followed by a short series of follow-up installment payments. Unlike credit cards or other types of retail financing, buy now pay later only requires a very basic credit check. Many of today’s fintech businesses now follow the basic “pay in 4” installment plan model due to its ease of use and popularity.

Advantages of installment buying

Should your business offer this type of payment option? There are certainly advantages of installment buying to consider.Numerous studies show that consumers are more likely to buy more overall when given the option of paying in installments. However, it depends on business demographics – Generation Z and Millennials are more likely to prefer installment payments in comparison to more traditional shoppers.

Another benefit of installment financing is that it opens the door to customers who might not be able to access traditional forms of credit. This can increaseconversion rates, average order volumes, and brand awareness all at once. After all, happy customers who feel well-served by a flexible checkout process are more likely to become repeat customers. While it’s not right for all business models, installment buying can add brand value for many.

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GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.