Before there were buy now, pay later apps, merchants offered installment buying plans. These purchase contracts were also known as time payments. They became very popular in the 1920s. Shoppers used them to pay for a wide variety of consumer products, including pianos, cars, furniture, radios, and sewing machines.
Many products became available to the mass market after World War I, but they often had high sticker prices that made them hard for consumers to purchase outright. So merchants offered installment plans to their customers to help them pay for these expensive goods. Buy now, pay later apps are the modern version of installment buying plans, offering similar benefits while addressing major weaknesses of the original plans.
Ownership Rights Transfer Immediately
During the 1920s, many installment buying plans were initially set up as leases. So if a shopper agreed to buy a couch using 12 monthly payments, they leased the couch for the first 11 months. They only became the owner of the couch when the merchant received the last installment payment. Otherwise, if the shopper missed a payment the merchant could repossess the couch. The merchant kept any payments the shopper made before the missed payment.
Merchants who offered installment buying plans could use a sneaky trick when a shopper made more than one installment purchase from them. The merchant could take payments that the shopper sent in and apply them toward the second purchase rather than the first one. As a result, the merchant could still repossess products after a missed payment even if the shopper had sent in enough payments to pay off the first purchase, but not the second one.
When a consumer makes a buy now, pay later purchase the ownership rights transfer at the cash register. The bank pays the full retail price to the merchant and makes a loan to the consumer. So the consumer immediately becomes the owner of the product. If the consumer misses a payment, the bank can charge late fees for that payment. But it won’t repossess the product while keeping all of the prior payments.
Installment Payments Are Available at Quality Stores
Another issue in the early days of installment buying was that certain merchants specialized in offering these plans to their customers. These merchants often sold furniture and electronics at extreme markups and were known for stocking low-quality products. They also offered installment payment plans with high implicit interest rates. They promoted their products by listing the monthly payment required for each product rather than its retail price or the interest rate implied by the monthly payments.
Some of these installment sales retailers still exist in impoverished neighborhoods. But buy now, pay later apps don’t work like that. Mainstream department stores and clothing stores list Klarna, PayPal, and other installment payment providers on their websites. The buy now, pay later app Affirm also has a deal with Peloton to provide financing for high-end exercise equipment. Many shoppers qualify for zero-interest loans on these installment plans because Peloton markets exercise bikes to wealthy, health-conscious customers who often have great credit scores.
Another buy now, pay later service provider is PayPal. Many online retailers already use PayPal to process their payments. And PayPal offers a plan called Pay in 4 that lets shoppers split up their purchases into four installments. Millions of retailers are already familiar with PayPal and have added Pay in 4 as a payment option. Pay in 4 is already widely available in the US and Britain and the installment payment service is now launching in Australia. With PayPal, Affirm, and Klarna all entering into partnerships with major merchants, shoppers no longer have to search for specialized stores that offer installment payments as an option. They can shop at the stores where they’d normally use their credit cards.
No-Interest Financing Is Available
Another problem with the original installment buying contracts was that the monthly payments were structured as high interest loans. Industry observers calculated that consumers were often paying more than 20 percent interest when they used installment buying plans during the 1920s. That’s similar to the interest rate on a credit card loan, although credit cards weren’t available back then.
Modern buy now, pay later apps typically split a purchase into four weekly payments and don’t charge any interest on these payments. Some retailers also offer zero interest on longer term payment plans, like Peloton does. Stores in Latin America often offer zero-interest installment payment plans to their customers as well, allowing shoppers to pay for a purchase over several months without incurring additional fees.
Latin American retailers often offer discounts on cash purchases, though, indicating that prices are marked up to some extent. And these markups can be considered a form of implicit interest, although stores that mark up their prices can still advertise zero-interest installment payments. Merchants that offer buy now, pay later financing in the United States typically don’t offer cash discounts because it’s difficult to offer these discounts while complying with the credit card networks’ rules. But in countries where most shoppers don’t have credit cards, cash discounts are still common so shoppers may still be paying a premium to use installment payments.
Buy now, pay later apps offer several advantages over installment buying. These apps allow shoppers to instantly gain full ownership rights to the products they purchased. Merchants can’t use sneaky tricks to repossess the product if the shopper misses a payment. Buy now, pay later apps also allow shoppers to buy products from major retailers whose brands are widely respected, rather than specialized retailers that often stock low quality products at huge markups. And buy now, pay later apps offer zero-percent financing on short term loans and may offer zero-percent interest on longer-term loans as well. These fintech apps are definitely better than the original installment payment plans from the 1920s.