2014 Deferred Interest Study: The Retailers with the Sneakiest Financing Offers

Deferred InterestThe busiest shopping period of the year is right around the corner and sales are expected to increase by 4.1% from last year’s holiday season, reaching up to $616.9 billion, according to the National Retail Federation. During this period, financing options begin to seem more and more appealing to consumers.

In addition to the regular financing options available during this period, a number of special promotions will surface as well. Most of these promotions are actually deferred interest plans.  Often advertised with bold tag lines stating “0% Interest for 12 months” or “Special Financing,” these plans sound great but the fine print reveals how financially disastrous they can be since the regular rate applies retroactively to the entire original balance if you do not pay in full by the end of the promotional period, or you make a late payment, no matter how much of the balance you have already paid back.

Suppose you open a new credit card in order to buy a couple of big-ticket items on your kids’ Christmas list – a laptop and a bicycle totaling $800, for example.  If you choose a traditional credit card that offers 0% on new purchases for six months and charges a 20% regular interest rate and you miss your payoff goal by one month (paying off your total balance in seven months instead of six), you’ll pay $2 in interest. However, if you choose a card that offers deferred interest, you’ll not only pay 27.5 times more interest (i.e. $55), easily eradicating any Black Friday deals you might have scored, but it will also take you an additional month to become debt free.

This report shows the financing options available through 50 large retailers.  Specifically, we identity which retailers offer deferred interest plans, and for those that do, how transparent their websites are in presenting key information to consumers about the terms of such plans.  Our analysis reveals that many retailers offering deferred interest financing are less than up-front about the true potential costs of these plans.

 

Key Findings

 
Deferred Interest Study

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  • 69% of major retailers offer a financing option. The best deals come from retailers that do not use deferred interest, which include: Target, Nordstrom, and Gap. The worst deals come from retailers that not only offer deferred interest, but also are not transparent about their policies – a list that includes the likes of Pottery Barn, Amazon.com, Lowe’s, and Macy’s.
  • Of the major retailers that provide financing, 50% currently offer a deferred interest plan.
  • Under a deferred interest payment plan, paying off your credit card debt one month behind schedule or missing a single payment could increase your financing costs by more than 27 times.
  • Of the retailers that currently offer deferred interest, 29% scored very low on our transparency scale (between 0 and 6 points) because they bury information in footnotes or terms and conditions pages. This is down from 41% last year.
  • 29% of the retailers offering deferred interest had complete and easily accessible information about the terms of their plans on their websites. These retailers received a high transparency score (10 points).
  • 35% of the deferred interest credit cards (or cards that may offer deferred interest in near future) are issued by Citi and 25% are issued by Synchrony Bank.
  • Despite not having a deferred interest plan themselves, several retailers offer the ability for consumers to make payments through PayPal, which offers a “Bill Me Later” deferred interest option.
  • 53% of the retailers that offer deferred interest provide consumers with an alternative, whereby they can take advantage of an initial discount rather than special financing. The average discount is 16%.
  • Companies such as Apple and Amazon, which have built their brands around providing consumer-friendly products, offer deferred interest – a decidedly misleading and potentially harmful financing option.
  • Either deferred interest payment plans should be abolished or regulators should institute more stringent disclosure requirements.

 
Transparency Scores

*RadioShack’s website is in transition and their transparency score may improve in the following weeks.

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Detailed Findings

 
Transparency Scoring for Retailers with Deferred Interest Plans

Retailer Location of “interest will be assessed from purchase date” Readability of “interest will be assessed from purchase date” Location of APR Readability of APR Total Points
Max 4 points Max 2 points Max 2 points Max 2 points Max 10 points
Walmart 4 2 2 2 10
Apple 4 2 2 2 10
JCPenney 4 2 2 2 10
Dell 4 2 2 2 10
Tractor Supply Co. 4 2 2 2 10
Home Depot 4 2 1 2 9
Sears 4 2 1 2 9
Best Buy 4 2 2 0 8
Staples 4 2 2 0 8
Lowes 2 2 1 2 7
Toys R Us 2 2 1 2 7
Office Depot & OfficeMax* 4 2 1 0 7
Macy’s 4 0 2 0 6
True Value 4 0 1 0 5
Amazon 2 0 1 0 3
Pottery Barn 2 0 1 0 3
RadioShack 0 0 1 0 1
*OfficeMax is undergoing a transition to merge with Office Depot

 
Deferred Interest Plans by Retailer

Retailer Offered Deferred Interest Plan in 2012 Offered Deferred Interest Plan in 2013 Offers Deferred Interest Plan in 2014 Deferred Interest Period Rate after Deferred Interest Applies to:
AAFES N/A NO NO N/A 10.24% N/A
Ace Hardware NO NO NO N/A 13.99% – 22.99% N/A
Amazon YES YES YES 6 months, 12 months, 24 months 25.99% Advertised Items
Apple YES YES YES 6 months, 12 months, 18 months 22.99% – 26.99% All items
Belk NO NO NO N/A 24.49% N/A
Best Buy YES YES YES 6 months, 18 months, 24 months 25.24% – 27.99% All items
BJs NO NO NO N/A 13.99% – 24.99% N/A
Costco NO NO NO N/A 15.24% N/A
Dell YES YES YES 6 months, 12 months 19.99% – 29.99% Selected Items
Dillard’s NO Yes. No online application. NO N/A 22.99% – 24.99% N/A
Gap NO NO NO N/A 23.99% N/A
Home Depot YES YES YES 6 months, 12 months, 24 months 17.99% – 26.99% Marked Categories
JCPenney YES YES YES 12 months 26.99% Furniture or Mattress Purchase
Kohls NO NO NO N/A 23.99% N/A
Lowes YES YES YES 6 months, 84 fixed monthly payments at 5.99% APR until paid in full 24.99% All items
Macy’s YES YES YES 12 months 26.99% Furniture or Mattress Purchase
Meijer NO Deferred interest plan inactive. Deferred interest plan inactive. N/A 23.99% N/A
Menard YES Yes, in limited locations. No online application Deferred interest plan inactive. N/A 24.99% N/A
Neiman Marcus N/A NO NO N/A 23.99% N/A
Nordstrom NO NO NO N/A 10.9% – 22.9% N/A
Office Depot & OfficeMax** YES YES YES 6 months 27.99% All items
Pottery Barn YES YES YES 12 months 26.99% All items
QVC NO NO NO N/A 24.99% N/A
RadioShack YES YES YES 6 months 28.99% All items
Sears YES YES YES 18 months 25.24% All items
Staples YES YES YES 6 months, 8 months, 12 months 25.24% – 27.99% All items
Target NO NO* NO* N/A 22.90% N/A
TJX NO NO NO N/A 26.99% N/A
Toys R Us YES YES YES 6 months, 12 months 26.99% All items
Tractor Supply Co. YES YES YES 6 months , 12 months 25.99% All items
True Value NO YES YES 6 months 13.99% – 24.99% All items
Victoria’s Secret YES Yes, in limited locations. No online application Deferred interest plan inactive. N/A 24.99% N/A
Walmart YES YES YES 6 months, 12 months, 18 months, 24 months 16.90% – 22.90% All items
Williams-Sonoma NO NO NO N/A 13.74% – 21.74% N/A
* Bill Me Later program from PayPal

N/A – no information could be collected and the scoring system could not be applied.

The retailers we identified that do not offer any type of financing include: Bed Bath and Beyond, Ross Stores, Barnes and Noble, AutoZone, Big Lots, Sherwin-Williams, Foot Locker, Burlington Coat Factory, Michaels Stores, The Sports Authority, IKEA, H&M, Advance Auto Parts, Game Stop and Pet Smart.

Applying for a credit card does not automatically sign you up for a deferred interest plan, but rather one will be offered to you based on creditworthiness and active promotions. Depending on the retailer, you may be able to use the plan just in store or for both online and in-store purchases.

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Methodology

 
In this year’s study, we selected 49 large retailers and analyzed the types of financing options that they provide to their customers. We collected information present on their product and disclosure websites and asked the retailers to confirm our findings. Where we were not able to obtain an official confirmation from the retailer, we called customer service lines. Information collected for this study was current as of November 10, 2014.

We analyzed the summary and main credit card pages associated with each retailer to determine A.) whether the retailers offer deferred interest and B) for those retailers that do offer deferred interest, how upfront and transparent they are in disclosing key terms associated with their deferred interest plans.

Based on this research, we identified four general types of retailers: 1) those not offering any financing options; 2)  those offering financing options but not offering deferred interest promotions; 3) retailers that have deferred-interest-specific language in their disclosures but for which we could not find any specific information on active or previous promotions or that do not allow the consumer to apply for deferred interest plans online; and finally, 4) retailers who offer deferred interest promotions.

Only those retailers that offer deferred interest financing plans for personal use (not business) with online applications were scored.  Retailers not offering any type of financing options were not scored or considered in our analysis. Retailers that included deferred interest language in their disclosures but for whom we could not find offers of deferred interest as well as those that did not allow the consumer to apply for deferred interest plans online were marked N/A and were not scored for this report.

Transparency for those with deferred interest was scored on a 10-point scale based on the location and the readability of the key terms associated with deferred interest plans.  Key terms include:

a.)    Language explaining that if customers do not pay their balance in full by the end of the promotional period, the standard interest rate will be applied to the entire original balance of their purchases retroactively from the purchase date.

b.)    The standard APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time.

Generally, these two key pieces of information are present somewhere on the retailers’ websites or online disclosures.  However, in many cases, the information was difficult to locate and understand.  Since most consumers do not look far beyond the tag line advertising “0% Interest,” or “No interest if paid in 12 months” the further away the key information was located from the tag line, the more misleading we considered it to be.  Additionally, we considered the size of the font used to list the key terms in determining the “readability” factor.   If the information was buried in a terms and conditions page, readability was automatically scored at zero since the size of the font does not matter if the consumer has very little chance of finding the information.

Specifically, the following criteria were applied:

1.)    Location of language indicating “the standard interest rate will be applied to the  balance from purchase date” (worth up to 4 points total)

  • Directly under tag line advertising promotion (4 points)
  • Need to scroll down to a separate location on page to find text  (2 points)
  • Must access a secondary page to get the info  (1 points)
  • Terms and conditions page only  (0 points)

2.)    Readability of language indicating “the standard interest rate will be applied to the balance from purchase date” (worth up to 2 points total)

  • Normal size font (2 points)
  • Small size font (0 points)
  • Terms and conditions page only (0 points)

3.)    Location of APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time.  (worth up to 2 points total)

  • Close proximity to advertising tag line (2 points)
  • Consumer needs to scroll down to a separate location from  advertising tag line and / or access secondary page (1 point)
  • Terms and Conditions page only (0 points)

4.)    Readability of APR that will apply at the end of the promotional period, and/or retroactively if the balance is not paid on time (worth up to 2 points total)

  • Normal size font – (2 points)
  • Small size font – (0 point)
  • Terms and conditions page only (0 points)

Retailers that did not offer deferred interest directly but allowed the “Bill me later” option from PayPal were not considered as offering deferred interest for the purpose of this report.

Ask The Experts:

For added insight into the use and potential regulation of deferred interest financing plans, we turned to experts in the fields of law, business and consumer protection. You can check out our panel of experts, the questions that we asked them and their comments below.

    • Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?
    • Do you expect deferred interest financing to be outlawed in the next few years?
    • What does the use of deferred interest say about the companies that employ it?
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    Edward A. Morse

    Professor of Law, McGrath North Mullin &Kratz Chair in Business Law, Creighton University School of Law

    Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?

    Consumers who know and understand the choice get a benefit – free financing – but they pay a substantial additional cost later if they fail to meet the contract conditions. Consumers love the benefit but the cost, not so much. Disclosure of the cost side of the equation is obviously important so that consumers can assess the consequences of not meeting the conditions. In some cases, those consequences may seem particularly costly, particularly if the breach was inadvertent or caused by some unanticipated economic hardship. But on the side of the company, a breach of the terms is a signal of risk. Those risks translate into higher costs in many cases. The additional payment obligations help to cover those costs.

    Do you expect deferred interest financing to be outlawed in the next few years?

    I don’t see this as a high priority target for legislation. But the regulators at the CFPB may well be looking at this issue, particularly with an eye toward disclosure requirements.

    What does the use of deferred interest say about the companies that employ it?

    I don’t believe that firms who do this are disreputable. They include not only retailers, but also payment card firms. It is simply a structure for payments that allocates risks in a particular manner, and which lets consumers benefit earlier in the contract rather than later if they conform to the payment terms.

    For example, let’s suppose we changed the terms to say, you pay 18% interest, but if you make all the payments on time, we’ll grant a discount when the contract is completed. This would be functionally similar, but it would require a higher outlay for the consumer in the early periods of the financing contract, which could affect their affordability. But of course, we all prefer mercy over justice when we are in a bind. A firm that overlooks at one-time error or otherwise works with a customer could expect some form of goodwill benefit, whereas one that sticks carefully to the agreement in all cases might not. We would like to do business in an environment where people are capable of exercising discretion to avoid perceived injustices. That is easier in the case of small firms giving personalized service in a local community. But for larger firms or more impersonal environments, the transaction costs may be too high.
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    Rashmi Dyal-Chand

    Professor of Law, Northeastern University School of Law

    Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?

    Yes, in most cases, this appears to be nothing less than another form of predatory lending. The problem cannot be solved with disclosure alone. Especially in contexts where the introductory period is short or it is easy to violate the payment or other terms, this new form of penalty ought to be banned by federal statute.
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    Praveen K. Kopalle

    Professor of Marketing, Dartmouth College

    Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?

    I see the following three main problems with deferred interest financing:

    1. The program is more likely to hit families and individuals that are either less financially well-off or less financially stable, i.e., who may not have the required finances to make the purchase viable.

    2. The program takes advantage of customers either discounting the future, i.e., out of sight or out of mind, or being optimistic about their future earning potential.

    3. It is indeed drastic that (i) if customers miss even a single payment or have not paid off the leftover few dollars before the deadline, the interest begins to accrue right from day 1 of purchase, and (ii) the interest rate is pretty high.

    Do you expect deferred interest financing to be outlawed in the next few years?

    I do not expect deferred interest financing to be outlawed in the next few years because the companies do indeed disclose the various aspects of the program, even though the different clauses may not be registering completely with the customer either because the information is presented in a fine print or the consumers are more focused on the product at hand and not about its future financing.

    What does the use of deferred interest say about the companies that employ it?

    I don’t think it says anything too negative about the companies that employ it. The companies argue that they are able to make the product more affordable for the consumer by not charging any interest so long as the payments are made in the pre-set period.

    However, apart from the incremental sales that these programs might produce to the companies, if in fact the companies are indeed making money purely from the deferred interest program, the companies should make the program less drastic to consumers. In other words, they should lower the interest rates on such programs and not make the interest accrue from day one if either a single payment is made or only a few dollars were paid after the deadline has passed.
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    Richard H. Frankel

    Associate Professor of Law, Thomas R. Kline School of Law, Drexel University

    Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?

    I see several possible problems with deferred interest financing. First, I think that many consumers tend to believe that they will be able to pay off their entire purchase in twelve-months or without making a late payment. In reality, I imagine that many consumers end up not being able to meet those terms, even if they genuinely believe that they can. Individuals tend to be overly optimistic about their ability to make the payments, and often, unexpected financial constraints arise that make consumers unable to pay off the debt during the zero interest period. If businesses market these products to consumers knowing that consumers are less likely to be able to pay off the debt on time than the consumers believe, then I think that is problematic and it will cause consumers to be saddled with a lot of interest payments.

    Second, the fact that the consumer is on the hook for the full amount of the deferred interest once they miss a payment or don’t pay off the full debt in twelve months is troubling. A consumer who pays all but 10% of the bill within 12 months will have to pay 100% of the accrued interest rather than 10%, even though only 10% of bill is unpaid. That’s a huge penalty for a consumer who has been diligently making payments but can’t quite make it to 100% to swallow.

    Third, it is troubling that deferred interest financing tends to carry a higher interest rate than other forms of credit. As I understand it, the interest rate for deferred interest is often above 20% and can reach 25%, whereas the interest rate on a more conventional credit card may be more like 13%. That high interest rate merely exacerbates the penalty imposed on the customer who pays off most of his or her bill (but not all), and then gets socked with a huge interest payment at the end of twelve months.

    Fourth, it is my understanding that even if you do deferred interest financing and pay off the loan within the twelve months (thereby avoiding any interest), you can still harm your credit score. This happens in cases where the financing is done by using a card that shows up on the credit report as a maxed out card. I doubt that many consumers are aware of the credit score implications of deferred interest financing, and I doubt that many companies offering deferred financing disclose the credit score implications when offering this form of financing (though I don’t know for sure).

    In short, I think these programs end up saddling consumers with substantial interest payments that companies know the consumer are likely to incur, but that consumers over-optimistically think they will avoid. If companies are consciously taking advantage of consumer naivety, that is the most troubling aspect of all.

    Do you expect deferred interest financing to be outlawed in the next few years?

    I don’t have an opinion. I hope that the CFPB takes action within its authority to restrict the use of deferred interest financing, but I don’t’ know if the agency will do so. My understanding is that the CARD Act of 2009 was intended to significantly restrict the use of deferred financing, but that it has not succeeded in the way that Congress intended. As a result, I think it would be perfectly appropriate for the CFPB to take action.

    What does the use of deferred interest say about the companies that employ it?

    That is hard to say. I doubt there is a single answer. Companies are trying be successful, and the holiday season is hugely important for a retailer’s success or failure. I imagine that many companies are trying to find ways to make it easier for consumer to purchase their products and are offering different financing options so as to reach the largest number of potential customers. Many retailers may not be aware of the problems with deferred interest financing. However, other retailers might be aware of the problems. As I said above, I am most troubled by the likelihood that many companies know that these financing programs are harmful to consumers and yet use them anyway.
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    Willa Gibson

    Dean’s Club Professor of Law, The University of Akron School of Law

    Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, disclosure)?

    The biggest issue with deferred interest financing is whether customers really understand the economic consequences of failing to make the necessary payment to avoid interest costs. Retailers use such financing as an advertising ploy to convince customers that merchandise, especially big ticket items such as computers, wide-screen televisions, sound systems, are affordable. Deferred interest financing is attractive to customers who want to purchase merchandise outside of their purchasing power. Such customers can rationalize the purchase because a significant time will transpire before the payment is due, and during that time, no interest is accrued on the amount owed. Customers are so delighted with the positive terms involving deferred interest financing that they fail to understand or retailers fail to disclose to them the potential downside of such financing—increased payment obligations, the potential default, and potential repossession of the purchased merchandise. When downside materializes, many customers are caught unaware, cannot afford the payments, and/or incur financial hardship in trying to fulfill their payment obligations.

    Deferred interest financing is the most devastating when retailers require that purchased merchandise serve as collateral to secure the amount owed. Customers, who were so attracted to such financing because it enables them to immediately own items they cannot afford, unknowingly run the risk of losing ownership to those very same items because of the method of financing they chose. Upon a default, the retailer or financer to whom the retailer sells the customer’s account may repossess the merchandise, which was used as collateral to secure the amount owed. How ironic — the very same device that provides a means for customers to own unaffordable merchandise can be used also to dissolve them of that ownership.

    Greater disclosure is necessary to highlight to customers the downside of deferred interest financing. Sadly, for some customers, even the additional disclosure that communicates effectively the downsides to choosing deferred interest financing, will not deter them from proceeding with such financing. For those customers, they will proceed with such purchases, despite disclosures, with optimism, not grounded necessarily in reality that they will not become victims to the downside of deferred interest financing.

    Do you expect deferred interest financing to be outlawed in the next few years?

    I don’t expect deferred interest financing to be outlawed in the next few years. Such financing is a strong economic tool for retailers and for the financers to which retailers often sell their financing paper. Both parties have very strong lobbying power. The retailers benefit by selling inventory at a much higher rate than they would absent such financing; and deferred interest financing provides opportunities for financers to buy more retail paper. Financers purchase retail paper to increase their customer base with the intention of “flipping” the retails loans which they have purchased. Flipping consists of the financer granting its new customer a new loan and refinancing the retail loan with the new loan. The refinanced loan — a combination of the retail loan and new loan — is all “new” money, on which the financer can usually charge an even higher interest rate than dictated by law.

    What does the use of deferred interest say about the companies that employ it?

    This type of refinancing is particularly attractive to those very same customers who are lured by deferred interest financing to purchase merchandise they cannot afford. Their budgets are tight. They are very susceptible to financers advertising borrowing pitches. Also, flipping is attractive to them when the downside of deferred interest financing materializes. Once confronted with the financial hardship of paying unexpected payments layered with interest costs, they welcome the opportunity to refinance their retail loan to bring it up-to-date and to obtain additional monies, which they mistakenly perceive as a financial remedy. Regulators should require greater disclosures to make customers of aware of the potential for flipping. Such practices should be a subject of review for the new Bureau of Consumer Protection created under the Dodd-Frank Act.

    As a former financer who solicited retail paper from retailers, I think retailers view deferred interest financing as another one of their advertising tools to sell merchandise. The credit aspect of this type of financing can be, however, problematic. Retailers that finance their own paper rather than selling it to financers have a responsibility to ensure that the customers to whom they offer such financing can afford to pay for the purchased merchandise. Utilizing deferred interest financing speaks badly of those retailers that provide such financing knowing that their customers’ credit and capacity profiles cannot sustain such purchases. Regulating credit standards for deferred interest financing is another area ripe for review by the Bureau of Consumer Protection.
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