When Did Installment Credit Explode on the American Scene?

Installment credit, a financial arrangement allowing consumers to pay for goods or services over time through regular, scheduled payments, often with interest, was not always a widespread feature of the American economy. For much of its history, consumer credit was limited in scope and availability. The significant expansion of installment credit, transforming it into a dominant force in consumer life, began in the early 20th century, particularly during the 1920s, and then exploded into the mainstream following World War II.

The Pre-Explosion Landscape of Consumer Credit

Before the widespread adoption of installment credit, consumer borrowing in the United States operated on a much smaller scale and served different purposes. Credit was primarily extended based on personal relationships and character, often in local communities. This informal system meant that access to credit was limited, typically reserved for known individuals or for specific, immediate needs rather than for the purchase of durable goods.

One common form of credit was store credit, where local merchants would allow trusted customers to purchase goods on account, settling their balance periodically. These arrangements were usually for necessities like groceries or clothing and were based on the merchant’s personal assessment of the customer’s ability to pay. Pawnbrokers also provided short-term loans, requiring tangible collateral in exchange for cash, serving as a safety net for those in urgent need of funds rather than a means to acquire new products.

Loans for larger sums were generally reserved for agricultural purposes, such as purchasing land or equipment, or for small business ventures. These loans were often structured with repayment tied to harvest cycles or business profits, reflecting the agrarian and entrepreneurial nature of the economy at the time. The concept of borrowing money to acquire non-essential consumer goods, especially those produced on a mass scale, was largely undeveloped and not a common financial practice.

The Roaring Twenties: Initial Surge and New Goods

The 1920s marked a significant turning point, ushering in the initial surge of installment credit and fundamentally changing American consumer habits. This decade, often dubbed the “Roaring Twenties,” was characterized by unprecedented economic prosperity and a boom in industrial production. Factories, honed by wartime demands, began churning out a vast array of new consumer durables, including automobiles, radios, refrigerators, and washing machines. These items, while highly desirable, were often beyond the immediate cash reach of the average American household.

Installment credit emerged as the primary mechanism to bridge this affordability gap, allowing consumers to “buy now, pay later.” Car manufacturers, notably General Motors, pioneered sophisticated financing plans through General Motors Acceptance Corporation (GMAC) in 1919. These plans typically required a down payment, often around 25% to 33% of the purchase price, with the remaining balance paid in fixed monthly installments over a period of 12 to 24 months, usually with interest. This model quickly spread to other industries selling high-value goods like furniture, pianos, and household appliances.

Aggressive advertising campaigns played a pivotal role in normalizing and encouraging debt-financed consumption during this period. Advertisements frequently showcased the convenience and social benefits of owning these new products, often featuring families enjoying their new car or modern appliances, subtly promoting the idea that borrowing was a smart and acceptable way to achieve a higher standard of living. This cultural shift began to erode the traditional aversion to debt, transforming it from a last resort into a legitimate tool for acquiring aspirational goods and participating in the burgeoning consumer culture. By the end of the decade, about 60% of furniture and 75% of radios were purchased on installment plans, and roughly 60% of cars were bought on credit, sometimes with interest rates reaching 30% or higher.

Post-World War II: Expansion into Mainstream Life

Following World War II, installment credit cemented its place as a pervasive and fundamental component of American consumer finance, far exceeding its earlier surge. The post-war era witnessed an economic boom, a surge in population known as the “baby boom,” and a significant migration to the suburbs. This confluence of factors generated immense demand for housing, automobiles, and a complete suite of household appliances, from washing machines and refrigerators to televisions and vacuum cleaners, to furnish new homes.

Financial institutions, including commercial banks and newly prominent consumer finance companies, actively expanded their offerings to meet this escalating demand. Banks, which had historically focused on commercial lending, increasingly entered the consumer credit market, providing loans for cars, home improvements, and other durable goods. This institutionalization made installment credit more accessible and standardized, moving beyond the direct financing offered by manufacturers or retailers. The terms for these loans typically involved fixed monthly payments over a set period, ranging from 12 to 60 months depending on the asset, and often required a down payment.

The widespread availability of these loans allowed millions of returning servicemen and their families to purchase homes and equip them with modern conveniences, fueling the growth of suburban communities across the nation. While early forms of revolving credit, like department store charge accounts and nascent credit cards, began to emerge, the dominant force in enabling the post-war consumer economy was still the fixed-term installment loan. The societal acceptance of borrowing for consumer goods became nearly universal, a stark contrast to the pre-1920s landscape where credit was often viewed with skepticism or reserved for specific, productive uses. Installment credit became deeply interwoven into the fabric of daily life, facilitating the American dream of homeownership and widespread access to consumer durables.