Are deferred interest plans abusive?

USA Today’s Daniel de Vise has an interesting article, 62% of Americans say this zero-interest payment plan should be against the law, about a form of consumer lending called deferred interest plans. Here’s an excerpt:

A popular payment plan offered by America’s big-box retailers promises no interest on your purchase if you pay it off in, say, six months.

It sounds great, at least until you read the fine print.

In “deferred interest” plans, consumer advocates say, bad things happen to the customer who fails to pay off the full balance by the time the promotional clock runs out.

If even $1 of debt remains at the end of the promotional period, the deal is off. Suddenly, the consumer owes every penny of the deferred interest, often at a steep annual rate of 30% or more. It’s as if the zero-interest promotion never existed.

* * *

Imagine buying a new refrigerator for $1,800 using a deferred interest offer of no interest for 24 months, at an annual percentage rate of 25.99%. If you pay $75 a month for each of those 24 months, you should be able to repay the full balance and avoid the interest. Miss a payment or two, however, and you will face an extra $900 or so in interest charges when the 24 months are up. The calculations come from Bankrate, which supplied the example.

The article quotes NCLC’s Chi Chi Wu as saying the plans are “designed to be complicated, to trip people up.” A WalletHub survey found that more than half of consumers don’t understand the plans. Many subprime borrowers end up paying interest, though overall 80% of consumers avoid the trap. There’s more in the article than I can quote. It’s definitely worth a read.

Now measure those facts against the Dodd-Frank’s prohibition on abusive practices, which describes practices as abusive if, among other things, the practice “takes unreasonable advantage of—(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service; [or] (B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service . . . .” Does a practice that ensnares two-fifths of subprime borrowers and a fifth of consumers overall into owing large interest payments fit within that when many consumers don’t understand the plans?


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