People who have taken advantage of "no interest" or "same as cash" deals to buy big-ticket items such as HDTVs, living-room furniture and appliances may have a harder time finding those deals next year when new federal rules go into effect.
Under the Unfair or Deceptive Acts or Practices Act approved in January, most retailers and finance companies will be expected to change the promotions they use to market such expensive goods. The changes do not take effect until July 2010, although the Federal Reserve expects to issue clarifications on the impending restrictions next month.
"There is quite a bit involved to come into compliance," said a Federal Reserve spokesman.
The rules, which were written jointly with the National Credit Union Administration and the Office of Thrift Supervision, apply to all banks, thrifts and federal credit unions. State-chartered credit unions, retailers that do not issue credit cards through a bank and auto dealers aren't covered by the new law.
Those businesses that are covered are going to have to do a better job of explaining just what a buyer would have to pay because of the deferred-interest charges that come with "no interest" and "same as cash" deals -- explanations now typically found in the teeny-tiny, eye-straining fine print of sales agreements.
"Deferred-interest (loans), as they are currently structured, would not be permitted under the new rules," according to the Federal Reserve.
Deferred-interest loans typically are marketed as being "interest-free" for a specified period, such as a year, but can run from a few months to two years or longer.
Retailers don't often handle this financing themselves. They hire finance companies to process payments.
The deals may require no regular payments, and when they do, those interim payments may not add up to the full purchase cost.
As long as the loan is paid in full and on time -- it's great for the buyer.
If not, the cost is steep -- interest rates of 20 percent or more are common.
The retailer can retroactively charge all interest accrued from the date of purchase if a buyer violates the account terms.
The violations can include monthly payments made even one day late -- known as a "hair trigger" clause -- or failure to make a necessary lump-sum payment before the end of the loan period.
Finance companies make some money on payment-processing fees, but what they count on are the people who fail to pay their bills in full and on time.
"It can add up substantially pretty quickly," said Ron Cardi, co-owner of Cardi's Furniture. The company has stores in Massachusetts and Rhode Island.
Cardi's has offered no-interest loans practically since the family business was founded more than 50 years ago, he said, asserting that the deals offer customers "a little breather" on their bills.
Problems crop up for both the buyer and the furniture store, Cardi said, when people succumb to the lure of a deal and fail to understand their own ability to pay the bill.
"When they buy strictly for the financing, it's not in the consumer's best interest," he said.
Deals that give buyers long periods of time before payments are due -- in some cases, two or three years -- can sour on the retailers.
"I've been saying this for years, to let those payments get stretched out too far is not a good thing," Cardi said. "There's a chance (customers) won't pay."
Under the new rules, retailers and finance companies will be permitted to offer interest-waiver plans -- the difference from a deferred-interest loan being that in an interest-waiver program the terms and conditions of the credit extended are described in the disclosures that consumers receive.
"It would have to be stated up-front what interest rate would apply if the balance isn't paid in full by the end of the term period," according to the Federal Reserve.
Finance companies and retailers could still offer interest-free deals under certain conditions.
"Institutions can still offer zero-percent promotional rates for specified periods so long as they disclose the rate that will apply thereafter," according to the Federal Reserve. "Furthermore, an institution could offer a plan where interest is assessed on purchases at a disclosed rate for a period of time but the interest charges are waived or refunded if the principal is paid in full by the end of the period."
(E-mail Paul Grimaldi at pgrimald(at)projo.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
Must credit The Providence Journal
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