Posted by: Alina Comoreanu

With the expensive holiday shopping season fast approaching and credit card debt again reaching historical levels, financing offers figure to be especially tempting in weeks to come. And that makes “deferred interest,” a feature commonly found in the fine print of retailer payment plans, particularly dangerous.

Deferred-interest financing is like a wolf in a sheep’s clothing, pairing an enticing offer – something like “no interest if paid in full” or “special financing” – with a clause that allows the deal to turn ugly if you make the slightest mistake. Paying your bill a day late or owing even $1 when the promotional period ends would enable the issuer to retroactively apply finance charges to your entire original purchase amount, as if the intro rate never existed.

Suppose, for example, you’re interested in opening a new credit card account to finance a couple of big-ticket items from your child’s Christmas list. And let’s say they cost a total of $800, an amount you think you can repay within six months in the absence of interest. But things happen, and it ends up taking you seven months instead. With a normal 0% credit card, you’d end up paying about $2 in interest (assuming a 20% regular APR) because interest would apply only to the balance remaining at the intro term’s conclusion. But with a deferred-interest credit card, you’d be on the hook for roughly 27.5 times that amount (i.e. $55 in interest).

In order to help consumers avoid such an unfortunate financial surprise, WalletHub evaluated the financing options available from 75 large retailers. Specifically, we determined which retailers use deferred interest and evaluated how transparent their websites are about the terms of such plans. After all, retailers that offer deferred-interest financing are typically less-than-up-front about just how much these plans can really end up costing you.

1. Key Findings
2. Detailed Findings
3. Methodology
4. Ask The Experts

 

Key Findings

 

Note: Survey results regarding deferred interest reflect the responses of people who demonstrated an understanding of how deferred interest works. Embed on your website<a href="http://ift.tt/2lIKZqj; <img src="//d2e70e9yced57e.cloudfront.net/wallethub/posts/28390/deferred-interest-image-2016.png" width="668" height="1317" alt="Deferred-Interest-Image-2016" /> </a> <div style="width:668px;font-size:12px;color:#888;">Source: <a href="http://ift.tt/2yo1Kgs;

88% of all deferred-interest credit cards are issued by just three banks: Synchrony, Citi and Comenity.

 

Retailers typically don’t list the regular APRs of deferred interest plans in large enough font or in a prominent location.

 

Retailers don’t seem to care about improving the transparency of their deferred-interest financing offers, as scores have stayed flat for the past three years.

 

Pottery Barn and West Elm are the least transparent retailers regarding the use of deferred interest for the second consecutive year.

 

Note: Big Lots, Kay Jewelers, Zales, Guitar Center, QVC, Wayfair, and West Elm were scored for the first time in 2016 and Pep Boys was scored for the first time this year. This is the first year Bed, Bath and Beyond offers deferred interest.

 

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 Regular APR	Readability of Regular APR	Total Points
	Max 4 points	Max 2 points	Max 2 points	Max 2 points	Max 10 points
JCPenney	4	2	2	2	10
Menards	4	2	2	2	10
Tractor Supply Co.	4	2	2	2	10
Apple	4	2	2	2	10
Big Lots	4	2	2	2	10
Kay Jewelers	4	2	2	2	10
Dell	4	2	1	2	9
Home Depot	4	2	1	2	9
Sears	4	2	1	2	9
Office Depot & OfficeMax	4	2	1	2	9
Walmart	4	2	1	2	9
Staples	4	2	1	2	9
Zales	4	2	1	2	9
Best Buy	4	2	2	0	8
Guitar Center	2	2	2	2	8
Lowes	2	2	1	2	7
Amazon	2	2	1	2	7
Toys R Us	2	2	1	2	7
QVC	4	2	1	0	7
Wayfair	2	2	1	2	7
True Value	4	0	0	0	4
Pottery Barn	0	0	1	0	1
West Elm	0	0	0	0	0

 Deferred Interest Plans by Retailer

Retailer	Previous Years Offering Deferred Interest	Offered Deferred Interest Plan in 2015	Deferred Interest Period	Regular Rate (After Deferred Interest)	Applies to:
AAFES	2012, 2013 & 2014 Not offered, 2015 Plan Inactive	Deferred interest plan inactive	N/A	10.49%	N/A
Abercrombie & Fitch	N/A	NO	N/A	25.24%	N/A
Academy Sports + Outdoors	N/A	NO	N/A	11.49% - 23.49%	N/A
Ace Hardware	Not Offered	NO	N/A	14.24% - 23.24%	N/A
Amazon	2012,2013,2014,2015	YES	6/12/24 months	26.24%	6/12 months - All Items, 24 months - Select Items
American Eagle Outfitters	N/A	NO	N/A	25.24%	N/A
Ann Taylor	N/A	NO	N/A	25.24%	N/A
Apple	2012,2013,2014,2015	YES	6/12/18 months	14.24% - 27.24%	All items
Barnes and Noble	Not Offered	NO	N/A	14.24% - 25.24%	N/A
Bass Pro Shops	N/A	NO	N/A	13.24% - 23.24%	N/A
Belk	Not Offered	NO	N/A	24.49%	N/A
Best Buy	2012,2013,2014,2015	YES	6/12/18/24 months	25.49%	6/12 months - All Items, 18/24 months - Select Items
Big Lots	N/A	YES	6/12 months	29.99%	All items
BJs	Not Offered	NO	N/A	15.24% - 25.24%	N/A
Brandsource*	N/A	N/A	N/A	29.74%	N/A
Cabela's	N/A	NO	N/A	15.52% - 21.52%	N/A
Cato Fashions	N/A	NO	N/A	22.90%	N/A
Costco	Not Offered	NO	N/A	15.49%	N/A
Dell	2012, 2013, 2014, 2015	YES	6/12 months	19.99% - 29.99%	6 months - All Items, 6/12 months - Select Items
Dick's Sporting Goods*	N/A	N/A	N/A	26.99%	N/A
Dillard's	Not Offered	NO	N/A	23.24% - 25.24%	N/A
DSW	N/A	NO	N/A	15.23% - 25.24%	N/A
Forever 21	N/A	NO	N/A	25.24%	N/A
Game Stop	Deferred interest plan inactive.	Deferred interest plan inactive.	N/A	27.24%	N/A
Gap	Not Offered	NO	N/A	25.24%	N/A
Guitar Center	N/A	YES	12 months	29.99%	All items
Hobby Lobby	N/A	NO	N/A	13.24% - 24.24%	N/A
Home Depot	2012,2013,2014,2015	YES	6/12 months	17.99% - 26.99%	6 months - All Items, 12 months - Select Items
JCPenney	2012, 2013, 2014, 2015	YES	18/24/36 months	26.99%	Furniture, Mattress and Appliances
Kay Jewelers	N/A	YES	12 months	17% - 26.99%	All items
Kohls	Not Offered	NO	N/A	24.24%	N/A
Lowes	2012,2013,2014,2015	YES	6 months	26.99%	All items
Macy's*	2012,2013,2014,2015	Deferred interest plan inactive.	N/A	25.49%	N/A
Meijer	Deferred interest plan inactive.	Deferred interest plan inactive.	N/A	24.24%	N/A
Menards	2012,2013 in limited locations,2014 inactive,2015	YES	6 months	25.24%	All items
Men's Wearhouse	N/A	NO	N/A	25.99%	N/A
Neiman Marcus	Not Offered	NO	N/A	24.24%	N/A
Nordstrom	Not Offered	NO	N/A	11.15% - 23.15%	N/A
Office Depot & OfficeMax	2012,2013,2014,2015	YES	6 months	26.24%	All items
Pier1 Imports	N/A	NO	N/A	27.24%	N/A
Pottery Barn	2012,2013,2014,2015	YES	12 months	26.99%	All items
QVC	Not Offered	YES	9/12/18 months	26.24%	Select Items
Saks Fifth Avenue	N/A	NO	N/A	24.24%	N/A
Sears	2012,2013,2014,2015	YES	6/12/18/24/48/60 months	7.49% – 25.49%	Select Items
Staples	2012,2013,2014,2015	YES	6/12/18 months	28.24%	All items
Target	Not Offered	NO	N/A	23.15%	N/A
Tiffany & Co.	N/A	NO	N/A	8% - 21%	N/A
TJX	Not Offered	NO	N/A	27.24%	N/A
Toys R Us	2012,2013,2014,2015	YES	6/12 months	26.99%	All items
Tractor Supply Co.	2012,2013,2014,2015	YES	6/12 months	26.24%	All items
True Value	2013,2014,2015	YES	6 months	26.24%	All items
Victoria's Secret	2012,2013 in limited locations,2014 and 2015 plan inactive	Deferred interest plan inactive	N/A	25.24%	N/A
Walmart	2012,2013,2014,2015	YES	6/12 months	17.15% - 23.15%	All items
Wayfair	N/A	YES	12 months	27.24%	All items
West Elm	N/A	YES	12 months	26.99%	All items
Williams-Sonoma	Not Offered	NO	N/A	16.99% - 23.99%	N/A
Zales	N/A	YES	6/12/18/36 months	29.24%	All items

* Offers store specific deferred-interest promotions

The retailers we found not to offer any type of financing include: Advance Auto Parts, AutoZone, Bed, Bath and Beyond, Burlington Coat Factory, Calares, Coach, Foot Locker, H&M, IKEA, Kate Spade New York, Michaels Stores, O'Reilly Auto Parts, Pet Smart, Radioshack, Ralph Lauren, Ross Stores, Sephora, Sherwin-Williams. Macy’s, Meijer, Game Stop, Victoria’s Secret and AAFES don’t currently use deferred interest, but they reserve the right to do so in the future.

Applying for a credit card does not automatically sign you up for a deferred-interest plan. Rather, one may be offered to you based on creditworthiness and active promotions. Depending on the retailer, financing plans could apply to in-store purchases only or online purchases as well.

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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 think deferred interest financing should be a point of emphasis for regulators?
• 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
• Rashmi Dyal-Chand Professor of Law, Northeastern University School of Law
• Richard H. Frankel Associate Professor of Law, Thomas R. Kline School of Law, Drexel University
• Praveen K. Kopalle Professor of Marketing, Dartmouth College
• Willa Gibson Dean’s Club Professor of Law, The University of Akron School of Law
• Thomas Horton Associate Professor Law, Law School, University of South Dakota
• Jeff Jones Assistant Professor in the Department of Finance and General Business at Missouri State University
• David Ely Professor of Finance in the College of Business Administration at San Diego State University

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. 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. 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. 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. 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. Thomas Horton Associate Professor Law, Law School, University of South Dakota Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product structure, disclosure)? It just jumps out of the water at me as incredibly deceptive, unfair, misleading and everything else that you could write under Section 5 of the Federal Trade Commission Act. Our credit laws are supposed to be based on full disclosure and full understanding, but anyone who takes a look at the complexity of most of those credit agreements, their eyes water over and they have no hope of ever figuring out of what the heck they say. In terms of the biggest issue, I think the nature of the product and the lack of a proper disclosure are both intrinsically intertwined. I think that the product itself is enormously problematical and troublesome from the standpoint of it’s basically designed to rip people off. People will come in and say: “Well yes, but buyer beware, and it’s not the company’s fault if the people don’t read the disclosure form carefully.” That’s just a bunch of crap. It’s an incredibly misleading product on its face that in my mind has no business in a fair marketplace. On top of that, the nature of the product is betrayed by the inability to actually figure out what they’re talking about as you read through the disclosures and whatnot, so that they themselves advertise it as something that it really is not. And if it were really such a fair, good product, they wouldn’t need to be so deceptive and misleading in the way that they’re marketing it to the public. Do you expect deferred interest financing to be outlawed in the next few years? Unfortunately, I do not. I think our Congress could care less about the 95% of the people who are out struggling in the American society. I think that they are focused on protecting the top 5%, and that includes those people running these companies that are putting out this kind of rip-off products, that I would call them. What does the use of deferred interest say about the companies that employ it? I think that any company should be operating ethically and morally and should have a public commitment based on the fact that when we allow it to become a corporation, we’re granting it a right to operate in our economy and in our free democracy and marketplace. I think that creates an ethical and moral obligation on their part to be good corporate citizens. Unfortunately, the atmosphere we’ve created now economically seems to foster and laud the opposite. We’re headed in the wrong direction and we need to put the brakes on quickly. People need to stand up and say, “We’ve had enough of this nonsense, and we’re not going to tolerate it.” I approach this all from a very ethical and moral outlook, and I think that our society in terms of our economics is dreadfully headed in the wrong direction. I think it augers great potential of disaster for our democracy and we need to get back on course very, very quickly. Jeff Jones Assistant Professor in the Department of Finance and General Business at Missouri State University Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, marketing)? For someone who is financially savvy, deferred interest financing arrangements can be beneficial, essentially providing an “interest-free” loan. This is especially true in situations where the retailer will not offer a price discount if the buyer pays cash at the time of the sale. For those who are less financially savvy, deferred interest loans can be problematic, particularly when the credit terms are not explicitly explained to the buyer. Even if they are fully explained, sometimes they are misunderstood by the consumer, which can result in large and unexpected interest charges down the road. Do you think deferred interest financing should be a point of emphasis for regulators? I think it should be, and I think it has been. The transparency to buyers has improved over the past 10 years, in my opinion. What does the use of deferred interest say about the companies that employ it? I do not believe that it says anything, other than that the company is doing everything in its power to generate sales. If deferred interest financing arrangements are allowed under the law, then most retail companies that sell “big-ticket” durable goods are forced to adopt them in some form. If a competitor offers generous financing terms through deferred interest financing, a company places itself at a disadvantage if they do not offer a similar type of financing plan to its customers. David Ely Professor of Finance in the College of Business Administration at San Diego State University Do you see any problem with deferred interest financing? If so, what is the biggest issue (e.g. product disclosure, marketing)? While deferred interest financing can help some consumers with large purchases, there is a risk that the financing expenses turn out to be much higher than anticipated. The challenge is in communicating the true interest costs, especially if payments are not made in a timely manner. Do you think deferred interest financing should be a point of emphasis for regulators? Regulators should not ban the practice, but should focus on improving disclosure. Consumers should understand what the financing expenses might potentially be when all of the terms of the lending agreement are not met. Regulators should focus on insisting on disclosure approaches that have been shown to effectively communicate these risks to the consumer.

Methodology

  We selected 75 large retailers and analyzed the financing options they give consumers. We collected information present on the product and disclosure pages of their websites and asked the retailers to confirm our findings. Where we were unable to obtain an official confirmation from a retailer, we called customer service lines. Information collected for this study is current as of October 21, 2016.

We analyzed the summary and main credit card pages associated with each retailer to determine: A) whether the retailers offer deferred interest; and B) if applicable, 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 using deferred interest; 3) retailers that have deferred-interest language in their disclosures but don’t seem to be using the feature in active offers or do not allow consumers to apply for deferred-interest offers online; and finally, 4) retailers who offer deferred-interest promotions.

Only retailers that offer deferred-interest financing plans for personal (not business) use and provide detailed information about their offers online were scored. Retailers not offering any type of financing were not scored. 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 regular 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 a tag line advertising, “0% interest,” “no interest if paid in 12 months,” or “special financing for 6 months,” for example, the farther away the key information was 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 regular 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 / pop-up page (1 point)
• Terms and Conditions page only (0 points)

4.) Readability of regular 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.

This report was first done in 2012, and the current methodology was introduced in 2013.

Issuer Comments

In the interest of transparency, we have included below Synchrony Bank’s thoughts on this study and the use of deferred interest.

“We disagree with the study methodology and, therefore, the results. The methodology appears to use a static formula to score placement of deferred interest language that is not based on how consumers actually read advertisements and gather information. Although not reflected in the results, Synchrony always provides a prominent disclosure that interest will accrue from the date of purchase if the balance is not paid in full by the promotion’s expiration date in close proximity to the first mention of the deferred interest promotion. This approach is both logical, and required by law.

Deferred interest is an important product that offers value to many consumers and retailers. Consumers continue to embrace deferred interest products, which are an increasingly important and popular source of financing in enabling them to make bigger ticket purchases they need from the businesses where they prefer to shop. We are committed to ensuring consumers understand deferred interest is a fair, transparent and easily understood product, and they understand how to avoid paying interest. We have taken a number of steps to improve and enhance our disclosures and consumer education well beyond what the CFPB and the law require.”

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