INSTALMENT SELLING, a system of retail trading which is in essence an extension of credit to purchasers, under some form of contract by which the purchaser agrees to make partial payments at stated intervals over a period of weeks, months or even years. In this article a resume of American developments will be given first. (X.) High-grade furniture houses were the first business houses to make use of instalment selling in the United States. They intro duced it early in the i 9th century. Eventually this method was extended to the marketing of all grades of various types of com modities, among the most important being books, clothing, jewel lery, sewing machines, pianos, gramophones, stoves, washing machines, vacuum cleaners, radios, refrigerators, and automobiles.
There has always been a prejudice against the use of bank credit to finance consumers' purchases. The belief, which has been fos tered by economists, has been that bank credit should be confined to the promotion of production, where there would be an in creased value created as a result of the extension of this credit. It is not surprising, therefore, that gradually a certain social stigma came to be attached to the purchase of consumption goods on the instalment plan, especially when it came into use by firms who handled low-grade goods and used questionable methods of marketing their products. If a person did not have sufficient funds to purchase commodities for consumption, the feeling was that he should go without them until such time as he could afford to purchase them out of accumulated savings. On the other hand, it was considered entirely legitimate for a railroad to purchase railway equipment through the use of railway equip ment bonds. In fact, this has been an accepted method of financing the acquisition of producers' capital. Payments are made on these bonds over a period of ten years under the same type of plan and contract as is used in instalment sales of consumers' goods. These bonds are considered a sound invest ment, and in many cases have shown themselves more secure than mortgage bonds. There has, then, been relatively little criticism of the sale of production goods on instalment plans, while there has been much criticism and discussion as to the justification of the application of these same methods of marketing to consump tion goods.
Antipathy to the purchase of consumption goods on credit doubtless explains the various refinements in names which have been given to instalment selling, such as "deferred payment plan," "purchasing out of income," and "budgeting plan." Since the World War ending in 1918, there has been a tre mendous expansion in the volume of consumption goods bought on the instalment plan. This has now become the customary and ac cepted method of buying homes, automobiles, electric refrigera tors, air conditioning and heating plants, and other types of expen sive household furnishings and equipment. It is estimated that, in 1936, some 59.4% of all automobiles were purchased on instal ments. According to the U.S. Bureau of Foreign and Domestic Service, in 1938, 31.7% of all retail sales in the United States were made on credit, such credit sales amounting to $i 1,230,000, 000. Of this sum, instalment sales accounted for $3,309,000,000 or 9.3% of the $35,425,000,00o total of retail sales in the nation.
The mainspring of the mechanism of instalment selling is the finance company of which there are two types: the independent company and the subsidiary company which is organized by the parent company for the sole purpose of financing sales of its prod ucts. An example of the first type is the Commercial Credit com pany of Baltimore, incorporated in 1910, while the General Motors Acceptance Corporation is the outstanding example of a sub sidiary. The independent companies finance sales of a variety of commodities, and are divided into a number of different depart ments which handle the financing of particular groups of com modities. As a rule, the independent companies use what is termed the non-recourse plan, while the subsidiaries use the recourse plan. Under the recourse plan the dealer signs the instalment paper and thus assumes a liability for the failure of the customer to live up to the terms of the contract. In case of default by the customer, the dealer resumes possession of the article and must again dispose of it to recover the remainder of money still owed to him. Under the non-recourse plan the dealer does not assume any obligation, and in case of default the finance company repossesses the article and offers it for sale. Both types of finance companies furnish credit for wholesale as well as retail sales.
As the most important part of instalment selling is devoted to automobiles, this feature of the development should be considered in more detail. Instalment selling of automobiles did not come into existence until after 191o. It was about that time that dealers in California are said to have originated it. Growth was slow in the industry for the first few years, and the sales were financed by the dealers themselves without assistance from finance companies. There were a few scattered examples of firms which purchased automobile paper beginning about 1913, but this was uncommon. Rapid growth started after the World War. The amount paid at the time of purchase varies from about 2 5 % to 4o% of the pur chase price of the car. The length of time covered by the sub sequent payments is usually between 6 and 18 months. Ordi narily, a larger down payment and a shorter elapsed time is used in the case of second-hand cars. In the sale of new cars the best practice calls for a minimum down payment of one-third the pur chase price and the length of time for subsequent payments to be spread over a period of not more than i 2 months. However, these terms are not followed closely, and there are many exceptions. It is found that the number of repossessions necessary and the losses of finance companies increase alarmingly when the terms are made more lenient. The terms of all instalment paper should be so drawn as to give the purchaser sufficient equity in the commodity to make it to his interest to keep up the remaining payments. Fire and theft insurance is paid by the purchaser, and the rate is usually high enough so that it will cover the risk of conversion, that is, the chance that the purchaser may steal the car before all his payments are made.
The most widely used form of contract in instalment selling is the conditional sale, which is signed by the purchaser. It contains three distinctive features : (I) title remains in the seller, (2) pos session is generally held by the purchaser, and (3) title passes to the purchaser on complying with the conditions of the sale. If the buyer fails to meet his payments the seller may repossess, and the seller is not compelled to refund any of the payments already made unless there is legislation to this effect in the State where the sale is made. In event of such legislation, the seller may be required to return to the purchaser any amount he receives on resale of the article above the amount which remains due from the purchaser and his costs. In those States where a conditional sale is not legal, a lease plan or chattel mortgage is used to finance instalment sales. In this case, the purchaser is considered to have leased the article and pays rent for the length of time covered by his payments (see infra). There is no fundamental difference to the purchaser in the cost of these various plans.
It is difficult to estimate the pure interest rate which the pur chaser pays for the money he borrows in instalment buying, be cause of the fact that the costs of financing are included in the payments made, in addition to the insurance charge, and the loan is amortized in the periodic payments. In general the cost of the credit varies between Io and 30% per annum.
In order to secure funds to finance this paper, finance companies resort to the sale of stock to the general public and of short-term paper to banks. They keep a certain amount of instalment paper in a selected bank under a deed of trust, and, against this collateral, they issue short-term paper which is offered to banks for short-term investments. The losses of finance companies have been relatively small, some reporting losses through repossessions of about 5 of 1 %. Large losses have, however, occurred where the terms of the credit departments have become too lax.
The custom of paying for homes on the instalment plan was first introduced on a large scale by the building and loan associa tions. See BUILDING SOCIETIES.
During the depression of the 193os, the U.S. Government, in an endeavour to stimulate the building of homes, established a system of Federal building and loan associations, the stock of which was guaranteed by that Government. Since this measure did not produce the desired volume of building, the Government went still further and agreed to compensate lenders who could not collect on loans to home builders, provided the loans did not ex ceed 90% of the appraised value of the property. It is gener ally believed that this policy was largely responsible for the expansion in residential building occurring in 1938 and Instalment buying, like other forms of purchasing on credit, is often a great convenience to the purchaser, enabling him to get possession of a home, an automobile, a refrigerator, or some other expensive article at a date far earlier than would be possi ble were he required to make full payment at the time of pur chase. From the social standpoint, there is, however, one serious objection to credit buying. This objection is that such buying expands unduly in times of optimism, saturates the market with durable goods, and thus tends to cause a depression in the durable goods industries at a later date. For example, under the stimulus of easy instalment credit, the United States produced in 1937 more than 4,800,00o motor cars, though 3,200,00o would prob ably have been ample to supply the normal requirements of the nation for replacements and also to supply those purchasing a car for the first time. (B. G.; W. I. K.)