Is Interest-free Credit too Good to be True?
Sunday Mercury, 6 June 1999
Take my money. Please.
I fully expected and was fully prepared to pay in full right then and there for my new computer, but the sales clerk had another idea: interest-free credit. He assured me that this was really, absolutely, positively a no-interest deal provided I cleared my balance on time.
Clearing my balance would pose no problem now or in the future, but the nuisance of arranging and then canceling direct debits and the other paperwork would be a nuisance. Normally, I would have refused this offer, but I agreed, primarily because I wanted to see the sales contract, and the small print thereon and thereunder. I wanted to see the catch, the gimmick.
The catch is immediately evident. For five of six months, the retailer – more accurately, the retailer’s finance company– takes such a paltry amount from my current account that it is like not paying anything at all.
Of course, after five months the remaining balance is considerable – and that is precisely what the finance company is banking on literally as well as figuratively. Many punters find that they can’t pay this large lump sum in one fell swoop, so down they swoop. Not only do they start charging interest, but the starting date reverts back to day one, the day of the purchase.
Let us give credit where it is due. This fact (“interest accrues from the first day of your loan") is clearly and immediately spelt out in the letter from the finance company which soon arrived. But it also mentions Credit Protection Insurance, and there are some details about “Deferred” interest free option accounts. Is mine deferred? It tells me that there are two ways to settle my account, but I am not sure if I already have one or the other or both. Besides, I had thought that I had agreed to one and only one kind of plan.
I now have to do some close reading to discover precisely what I have and have not agreed to. And while the accompanying policy document is personal in noting the specific amount to be debited, it is not personal enough to describe or even label my particular account. A few hypothetical case studies could easily have clearly spelled out the terms and the risks.
Having an Alice in Wonderland experience in PCWorld did not happen to me uniquely: “A number of cases like this have come to our attention,” says Melanie Green, Senior Researcher at the Consumer Association. “It is confusing in that many customers end up paying more than they intended, because you get to the end of the interest-free period, discover that you can’t pay the balance, and then you go onto high-interest charges. And this is particularly difficult when you didn’t intend doing so.”
Her organisation also feels “that retailers should make it clearer at the outset that the debt they set up will not pay off the full amount within the initial interest-free period.”
For interest-free credit as for any financial transaction, the terms and conditions are critically important, but my experience spotlights the fact that the circumstances in which such arrangements arise is also crucial. The concept of deferred payment came up suddenly and unexpectedly, and at a time when I was preoccupied with other matters. My brain was thinking about computers, not computing complex financial transactions.
Many of us are enticed to buy extended warranties under similar conditions, and even the Government urges consumers to resist pressure to buy extended warranties and service contracts. Consumer Affairs Minister Kim Howells notes that the Sale of Goods Act already protects us regarding quality and durability, and “you should shop around because may be able to find a better value policy or service agreement elsewhere.” Consider the nature of the product too. A washing machine is more likely to break down than a stereo.
www.robertliebman.com