Be Wary of Open-Ended Debt
& Door-to-Door Sales
Door-to-door sales have long been a source of problems for consumers. Shoddy or incomplete workmanship in home
improvements services, price-gouging, deception about financing -- all are commonplace problems in the door to door sales world. Recently,
new products, and a new twist in financing are showing up at the door
The sale of over-priced satellite dishes and water conditioners seems to be the latest fad. Meat sales with a free freezer and vacuum sales have been a
form in the past. Adding to the exorbitant cost is a common financing arrangement for these products: the sellers do not use a fixed term contract, but rather arrange
for a special "credit card" account to be opened especially for that purpose.
So what's wrong with that? Well, for starters, the consumer will sign on the dotted line without a clue as to what the bottom line price will be to buy the product.
And that bottom line is liable to be more expensive than if it were financed by a fixed term contract.
Questionable Sales Tactics
In Florida, companies with names which sound like municipal water utilities send
out flyers targeted to the elderly: "CONSUMER ALERT: Important Bulletin."
The bulletin warns consumers that "chemicals used to disinfect your drinking water may be increasing your risk of cancer, liver and kidney damage! Please
have your water tested today. There is no cost or obligation. This is a public awareness program."
Not surprisingly, those tests -- conducted with elaborate tools -- show dangers in
the water, even bottled water. But, "fortunately," the sales representative can offer the consumer a water conditioner costing $2000 to $2700 to correct the
problem. (A comparable product is available from a retailer for $350 to $400.)
In some small towns and rural areas, the new hot product is a satellite dish, to
bring new television vistas to the viewer. For prices in the $4000 to $5000 range, the consumer can purchase the satellite dish and a year of programming.
(Compare those prices to the results of one advocate's check with local dish dealers to find prices ranging from $100 to $1200.)
The New Financing Arrangement to Beware of
Door to door salespeople marketing big-ticket items have always offered to
arrange financing -- and it usually was not the best credit deal available. But many financing arrangements being used today have a new twist. Instead of getting a
contract that calls for repayment of a fixed amount over a specific period of time, the seller signs the consumer up for a limited-use credit card with credit cards
usually issued by affiliates set up by finance companies.
Closed End Credit vs. Open End Credit
To understand the rub for the consumer with the credit card purchase, it is
necessary to understand the difference between "open-end" and "closed-end"
credit. "Closed-end credit" is a specified amount of debt, which is repayable according to set terms over a specified amount of time. Car loans, for example,
are typically closed-end: $5000 at 12% for 48 months at $131.67/month. Since those terms are fixed at the outset, the consumer can know that the bottom line
cost will be $6,320.16, of which $1320.16 is the financing cost. The Truth in Lending Act requires that consumers be given all of this information at or before
the time they sign the loan. The most critical part of the TIL disclosure statement for this car loan would look like this:
ANNUAL PERCENTAGE RATE
The cost of your credit at a yearly rate. - 12%
FINANCE CHARGE
The dollar amount the credit will cost you. - $1320.16
AMOUNT FINANCED
The amount of credit provided to you or on your behalf. - $5000.00
TOTAL OF PAYMENTS
The amount you will have paid after you have made all payments as scheduled. - $6320.16
The typical credit card, on the other hand, is a prime example of "open-end credit." When you initially get the card, you probably have no charge on it at all.
The amount of debt fluctuates as you add charges to it, and make your monthly payments on it. It is therefore impossible, with legitimate open-end credit, to be
able to tell the consumer at the beginning what anything except the interest rate will
be: the "amount financed" will change with what is charged; the "finance charge" as a dollar amount will depend not only on the amount you charge, but also on
when you make your payments, and how much you choose to pay (most open-end accounts specify only "minimum monthly payments").
Since none of that is known when you open the account, no bottom line "total of payments" can be disclosed, either. So Truth in Lending has different disclosure
requirements for open-end credit. There are quite a few things which must be disclosed, but the important price information might look like this:
STATE MONTHLY PERIODIC RATE ANNUAL PERCENTAGE RATE METHOD OF COMPUTING THE BALANCE FOR PURCHASES ANNUAL OR MEMBER- SHIP FEE TRANS- ACTION FEE MINIMUM FINANCE CHARGE
Tx 1.47% 17.64% Average daily balance (including new purchases) NONE NONE $ .50 All other states 1.487% 17.85%
Not nearly so informative, is it? For this reason, some lenders prefer to structure credit as open-end, even if it doesn't really seem to be open-end. (Truth in
Lending has a legal definition for open-end credit.) This is called "spurious open-end credit," because it is really closed-end credit disguised as open-end so
that consumers will not see the bottom line cost of the transaction before they commit themselves. Obviously the more expensive the deal, the more incentive
there is for unethical sellers and lenders to play this game of deceit.
The lack of information about the bottom line cost to consumers is not the only disadvantage built into these deals. Typically the minimum monthly payments are
set at an amount which will take much longer for the consumer to pay off than a comparable closed-end loan. Longer terms mean higher cost in finance charges,
so the invisible bottom line cost is likely to be higher than it would be if it were financed by a regular closed-end loan.
The Cost To Consumers
Here's how one satellite sale to an elderly man played out:
The purchase price for the package was slightly over $4000, and the salesman told him the payments would be about $55 per month, though when the account
was opened, the minimum monthly payment was fixed at $77 per month. The cost information on the application looked like the second chart above, except the
APR was 18%. That was all. But if the lender had given the real information about the transaction, it would have looked like this:
ANNUAL PERCENTAGE RATE
The cost of your credit at a yearly rate. - 18.72%
FINANCE CHARGE The dollar amount the credit will cost you. - $4476.18
AMOUNT FINANCED The amount of credit provided to you or on your behalf. - $4046.00
TOTAL OF PAYMENTS
The amount you will have paid after you have made all payments as scheduled. - $8522.18
Payment Schedule
110 monthly payments of $77 and 1 final payment of $52.18
Not only was the bottom line price more than double the cash price, but he would have to make 111 monthly payments to pay off the satellite dish. This senior had
no way of knowing he was committing that much of his income for over 9 years (until he was 89 years old) to pay it off.
And do the buyers get any real advantages from the "credit card" that finances these purchases? Not really. Even in theory, they cannot be used widely.
Commonly, only retailers linked to the deal will recognize them. While follow-up purchases may be allowed, (e.g. chemicals for the water conditioner, and
programming for the satellite dish) they are comparatively minor, and readily available elsewhere, probably more cheaply. But it is also common for these types
of accounts to set the credit limit at (or even below) the amount of the initial purchase, so there is no room on the account for the consumer to make additional
charges in any event -- at least not for a good long while.
What Victims of Open End Credit Scams Should Know
Alerting consumers in your community about these kinds of scams is the best
prevention. But if you know of a consumer who has been caught, there are potential legal remedies. First, the sales pitch often includes misrepresentations
and perhaps even fraud, which would be subject to challenge under the state unfair and deceptive trade practices act. For the water conditioner, these might include
leading consumers to think the seller was affiliated with a government or a utility, or misrepresenting the need for the product, or exaggerating its merits.
For the satellite dish, the salesman may misrepresent the cost of the programming package, or what's available with the package. In either case, misrepresentations
concerning the cost of the financing package are likely. Even if the salesman "low-balls" the monthly payment, simply making a misrepresentation that he can
"get you a good deal" is arguably a deceptive statement.
Legal Remedies
As door-to-door sales, these transactions are subject to a 3-day cooling off
period. If the seller does not give proper disclosures concerning the right to cancel the deal within 3 days, or if it installs the goods prior to the end of the cooling off
period, the purchaser may still be able to cancel the deal, or secure damages under state UDAP or Home Solicitation Sales Acts (HSSA). If the purchaser's
home is taken as security for the financing, or a lien attaches to the home as a result of the financing, the 3-day cooling off period under the Truth in Lending Act
may apply in addition to, or instead of, the state HSSA. If TIL's cooling off period applies, and the seller or financier violated certain of the Act's
requirements, it may be possible to cancel the transaction any time within 3 years of the sale, being obligated only to return the property or its value.
The general disclosures in "spurious open-end" transactions may also be
challenged under the Truth in Lending Act, as courts are willing to look at the true
nature of a transaction, and not be controlled by labels alone. Similarly, state credit
laws, such as retail installment sales acts, may distinguish between open-end and closed-end credit, and miscasting a transaction may run afoul of them.
This page is based on information provided as a service of the National Consumer Law Center and the Federal Trade Commission. This
information is provided as a public service by the Law Office of Jim McMillen.
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