By Nancy Pratt
AFL-CIO Department of Research
Joe Brown bought a new car last year on the “no money down, years to pay” plan. Six months later he found he couldn’t keep up with his payments. His car was repossessed. Joe was sad, but he thought his worries about the car were over. He was wrong.
Joe thought if the repossessed car was resold at a loss, the dealer would be the loser. He learned to his surprise that the “buy now, pay later” plan was not that simple. The paper he signed when he bought the car on the installment plan was a binding contract. The contract made him, not the dealer, responsible for any losses.
Joe was also surprised to find the dealer was out of the picture entirely. The contract was between Joe and a sales finance company. The finance company took him to court and attached his wages.
For many people like Joe buying on time seems simpler than paying cash. A din of radio commercials and newspaper ads plays on this idea. In fact, the ads make it appear that paying in those “easy monthly installments” is almost like getting something for nothing.
Many a housewife who wouldn’t dream of withdrawing $69 from the family bank account to pay cash for a new vacuum cleaner that’s caught her eye can be talked into signing up for a year’s payments of $2 a week, figuring she can squeeze the $2 out of her petty cash allowance. She doesn’t stop to think that she has committed herself to a yearly expenditure of $104 for that $69 appliance, of which $35 goes to the store for the privilege of those “slow, easy” payments.
This carefree attitude toward installment buying has made virtual paupers out of many families whose yearly earnings have never been so high. In an increasing number of cases, such a large proportion of their income is tied up in installment payments that there’s almost nothing left over to pay for rent, food and other everyday needs.
The increased importance of this problem is indicated by the fact that total consumer credit has been rising rapidly and has now reached a record total of over $37 billion. A major part of this increase has been credit utilized for the purchase of automobiles. So-called “automobile paper” has increased by almost 50 per cent in the last two and one-half years.
A recent study by the Federal Reserve Board of the financial position of American consumers in early 1956 gives considerable information concerning those families who have acquired personal debts. Among the facts brought out by the Federal Reserve survey are the following:
- Fifty-six per cent of all American families owe some type of personal debt, not including mortgage and business debt. The average debt per family is about $450.
- The proportion of families with debt is highest in the group with incomes of $2,000 to $7,500, but even among families with incomes under $1000 about 35 per cent have some personal debt.
- Families with debt run the gamut of all types of occupations, all regions of the country and all age groups. However, the rate is higher for families whose wage-earner is in the age bracket from 18 to 44 with children under 18 years of age. The rate is also higher for Negro families than for whites.
- Even though families of lower income tend to have lower-sized debts, there are many families in the low income groups whose installment payments constitute 20 per cent or more of their total disposable income. In fact, over one-fourth of the families with debt are carrying this heavy burden.
- Of those families who are carrying some debt, 70 per cent have no liquid assets or have liquid assets that amount to less than the total personal debt. Lower income families show a substantially higher proportion without liquid assets.
These finding show that indebtedness is the rule, not the exception, among American families today. Buying on the installment plan is now firmly established as a normal means of purchasing goods. About three-fifths of all families purchasing new or used cars and over half the families buying furniture and home appliances utilized some type of credit for these purchases in 1955.
The question of consumer credit is not just an academic problem of no concern to the trade union movement. All union members need to be thoroughly informed so that they can utilize consumer credit wisely. Otherwise, union members will find that their hard-won wage increases will be dissipated in excessive interest charges, repossession costs and various types of shady practices.
Easy consumer credit has helped Americans to enjoy a higher standard of living than any other country in the world– and to achieve it at a time when they are still young enough to enjoy it. It has enlarged the markets for the nation’s goods by providing mass distribution for our mass production industries.
The continued economic growth of industries such as auto, appliances and furniture is dependent on people being able to buy successfully on the installment plant. Imagine the drop in auto sales, for instance, if everyone had to save up $2500 needed to pay cash for a new 1957 car.
There’s nothing wrong with installment buying– so long as the buyer knows what he is doing. However, buying on credit is not as simple as buying for cash. In some cases it may be wiser to buy on installments than pay cash. But signing up for “easy” payments from the store is not the only way to get credit. A better deal might be obtained, for example, by taking out a cash loan from a bank or a credit union.
The purpose of this article and the one to follow is to discuss some of these alternatives– and the pitfalls and gimmicks in the installment buying field– so that consumers can shop for credit as intelligently as they shop for the autos, appliances and other goods their credit allows them to buy.
In many ways the average American’s understanding of installment buying has not kept pace with his buying habits. He is simply not aware of the “cost” of credit. This lack of knowledge has led many people to overextend themselves.
One proof that this problem has reached serious proportions for many families is the emergence in recent years of a new business– the debt adjustment or “debt pooling” agency.
Such agencies sell nothing but hope– the hope that with their advice people can get out from under the debts they’ve accumulated. Their favorite opening for radio commercials is:
“Why be always borrowing from Peter to pay Paul? Let us help you as we’ve helped thousands of other families.”
The honest agencies may charge somewhere between 12 and 18 per cent interest for their services, but the dishonest ones, which far out-number the honest ones, charge whatever the traffic will bear. As they usually take their fee immediately, before paying any client’s bills, they really don’t care after the first few months whether you follow their plan or not.
Case histories show that families who seek such help are not only those among the lower income groups. The files of one such agency showed it had some clients with incomes as high as $500 a week.
Consumers are more vulnerable to shady installment credit schemes partly because legislative safeguards are inadequate to protect them. Only fourteen states have laws requiring sellers to distinguish between carrying or service charges and the cash sale price of an item. Some of these laws cover only automobile sales.
Auto contracts tend to be the most complicated because there are so many cost factors involved. Every contract should list separately the credit charge and credit investigation fees, but in auto contracts there are additional charges for car insurance and life insurance to protect the car dealer in case the buyer dies before he finishes making payments.
Investigations of “packed” installment contracts show that a common way to pad costs is no charge exorbitant rates for insurance charges– rates that are way above standard insurance rates.
The first step in ascertaining whether a dealer’s prices are in line with those of other dealers is to insist on an itemized contract. It’s not enough to compare trade-ins, down payments, or even service charges alone when shopping for the best buy. The time sale price is the best guide, but an even better practice is to have the dealer itemize all items.
It Pays to Pay Up As Quickly as Possible
Assuming a $1500 debt on a new car with interest charges of 12%
You pay per month: If the repayment period is: BUT total credit charges amount to: $140.00 12 months $180 98.33 18 months 270 77.50 24 months 360 56.66 36 months 540
The box [below] shows the various costs that should be listed.
Itemized Installment Auto Sales ContractThe cash sale price of the car .................. $2500.00 The amount of your down payments and trade-in, with a brief description of the goods traded in .......................... $1000.00 ________ The amount of the difference to be financed ..... $1500.00 The costs of insurance and other benefit charges with the coverage defined and itemized as: Personal liability ................ $34.00 Property damage ................... $10.00 Collision, $50 deductible ......... $20.00 Credit life insurance ............. $15.00 ________ 79.00 Official fees, such as credit investigation ........ 5.00 ________ The principal or unpaid balance. This is the amount you still owe ............................ $1584.00 The amount of credit service charge ............. 221.76 ________ The time sale price. This is the total amount the car costs you, buying on time ........ $1805.76 Number of monthly installment payments ....... 24 AMOUNT OF EACH MONTH INSTALLMENT ............... $75.24
What is a responsible credit service charge for autos? There is, of course, no one charge that is “reasonable” for all parts of the country and all types of goods. Generally, state laws do not require dealers to give consumers true interest rates. The important thing is to read the contract and find out what part of your monthly payments are going to reduce the principal on your loan and what is going for installment charges.
A new law in New York does set maximum rates for auto sales contracts. They are: (1) For new cars, not more than 7 per cent a year of the total amount you owe to begin with; (2) for used cars of the current model year or two previous model years, 10 per cent a year; (3) for all other used cars, not more than 13 per cent a year.
Suppose the principal balance on your new car is $1584 (as in the illustration above) your payments will run for 24 months. The maximum service charge should be 14 per cent of this principal or $221.76. This should be stated in the contract as in the illustration above.
As Sylvia Porter, financial editor for the New York Post, pointed out in a recent conference on credit:
“The seller is often competing not in the price and quality of his goods, but in the looseness of his financing and selling terms. *** The individual buyer cheats himself when he uses loose credit. When he buys an automobile on terms of one-third down and 36 months to pay, the first 10 1/2 payments may just go for financing charges, though he doesn’t realize it.”
Look at the total cost of an item rather than just the monthly payments.
Thus far we have considered only the “cost” of installment charges. There are other angles to buying on credit that the consumer must watch.
For instance, what does the fine print in the contract say about repossession? Suppose a buyer has paid $2500 on a $2550 automobile. In most states, if the contract so stipulates, the car can be repossessed even if he defaults only on the last payment. He loses not only the car but the $2500. He still owes the full unpaid balance, plus any cost involved in repossession.
In some states, in the case of repossession, the buyer has the right under certain circumstances to ask for a public auction. A repossessed car, however, generally does not bring much at such an auction and the costs have to be paid for, so he may still owe a lot of the original debt even though he has lost the car. The finance company or other holder of the contract can collect this debt through court action.
FOR YOUR PROTECTION
- Buy only from a reputable dealer. Beware of dealers who are in business not to sell their products but only their finance. Be wary of ads that emphasize easy credit above the quality of their wares.
- Read your installment contract before you sign it. Be sure you know the amount of credit charges, the penalties for default or delinquency on payments, and other conditions of repayment.
- Examine carefully the manufacturers’ or dealers’ guarantee on the life of your equipment. Know what recourse you have after the “thirty days’ trial period” if the appliance breaks down.
- Check the legislation in your state, and make certain that the dealer lives up to the requirements of the law. If your state legislation is inadequate, work with unions and consumer groups to do something about it.
The moral is: Don’t buy on time unless you are reasonably sure you can meet the payments. And remember, also, the longer the terms of the contract, the greater the chance some unforeseen emergency may arise before you’ve made your final payment.
Credit experts have pointed out that long-term contracts the goods may actually deteriorate faster than the rate at which the payments are being made. Perhaps the best illustration of this point is in clothing.
If Joe Brown buys a $50 suit from one of the “no money down, years to pay” stores, he may find that the suit has worn out before his 18 monthly installment payments are up. Then he has to buy another suit. These payments pile up on the old ones and thus pyramid his installment debt. He’s no longer enjoying the goods before he pays for them. He’s paying after the goods have lost all value.
Another point that needs to be checked in the contract is what happens if the buyer repays his debt before the stated time. The shady dealer doesn’t want his debts to be paid up quickly. He wants to squeeze out all those installment charges.
A favorite gimmick in bad contracts is to provide that the buyer still must pay installment charges or interest rates on the original contract terms, even if the debt is paid more quickly. The New York state law stipulates that an installment contract must provide a refund credit based on the anticipated installments.
Exorbitant “delinquency” charges are a rather common pitfall for the unwary installment buyer. The new New York state law also covers this point, providing that if the purchaser defaults for a period of at least ten days, the delinquency charge is not to exceed 5 per cent of each installment due or $5, whichever is less. However, in addition, attorney’s fees up to 15 per cent of the amount due and court costs may also be charged.
A widely advertised feature of installment contracts in the furniture field is the “add-on” clause. It sounds good at first glance. Joe Brown buys a bedroom suite at $199.95 on the installment plan. He’s almost completed his payments when he decided he wants a dining room table.
“No need to draw up a new contract,” the salesman tells him. “We’ll simply add it on to your original sales contract and extend the period.”
The hitch is that if he defaults on the contract, Joe loses not only the table but also the bedroom suite he’s completed payments on. Of course, the shady furniture stores love this plan. It encourages customers to buy all their furniture from that one store. But for the purchaser these “add-on” clauses merely add to the risk of repossession.
Most people don’t realize when they sign an installment contract that the dealer normally sells the contract to a bank or sales finance company. This means the buyer is responsible to only to the bank or finance company for repayments. On the other hand, the finance company is not in any way responsible to the buyer for the product he has bought. Any questions of guarantees or misrepresentation are strictly between the buyer and seller.
This has important implications if the product turns out to be faulty. Assume Joe Brown wants to buy a watch for his wife. The dealer tells him it’s a real bargain at $59.95– an unknown company but seventeen-jeweled, ten-karat gold filling. Joe Brown blithely signs a contract. A week later the spring falls out. He returns the watch to the dealer, who take it back, promising to do what he can to fix it.
But this doesn’t stop a sales finance company, disclaiming all interest in whether the watch works or not, from pounding on Joe’s door for money. And if Joe decides not to pay, he may open his pay envelope some day and learn that his wages have been attached.
Dealers often imply that a written guarantee isn’t needed because the buyer hasn’t paid for anything when he signs the contract. Don’t be fooled. Insist that a guarantee is included in any installment contract. Don’t sign a contract containing a so-called “exculpatory” clause– one that says the buyer will not enforce any defenses he may have against the seller or assignee of the seller.
Look again at the box [above]. These are the basic rules of self-defense for consumers buying on the installment plan.
Protection against frauds and gyps is only half the problem. It doesn’t guarantee that the consumer is making the most of his money when he buys on credit.
Next month’s article will look into some of the alternatives to buying on the installment plant. It will also try to suggest some guides as to how much of the family income can be committed to “time”purchases without endangering its solvency.
Source: 1956, American Federationist, Vol 63.