CONSUMERS : No, Low or Deferred: Let Buyer Beware of Interest

Unless you went out and paid cash to buy that big screen television you wanted just in time for the Super Bowl, you’ve probably encountered several ways recently to finance a big-ticket item, a purchase costing $2,300 or more.

The hottest of the options now being offered by retailers--a method more popular than a Joe Montana touchdown--are deferred, low-interest or no-interest payment plans for consumers seeking everything from furs to furniture. Some companies or manufacturers offer long-term payment plans, featuring three to six months without interest; some offer up to a year with no interest charges.

It all sounds as solid as an NFL lineman. But are such seemingly wonderful deals all too often not much better than a Super Bowl bet on the Denver Broncos?

“Nothing’s ever free--that’s why consumers should be careful whether (they’re being offered) a straight, deferred-payment plan or deferred interest or no interest at all for a certain period of time,” said Ken McEldowney, executive director of Consumer Action, a San Francisco-based nonprofit consumer advocacy group.

Consumers, McEldowney explained, have been paying more attention to interest rates when using store charges or credit cards. Why? Because a change in the federal tax law allows them to write off only 10% of such charges on their 1990 tax forms; 0% after that. “People are becoming much more sensitive to interest rates now, so when they see 0% interest they’re intrigued by it,” he said.

But, if they investigate most deals offering deferred payments or reduced interest rates, they will find “it’s really a sales gimmick,” he said. “Any time you borrow long-term, there’s a cost for the money and a cost for the loan.”

Bill Henderson, of the National Retail Credit Assn. in St. Louis, said he has seen an increase recently in retailers offering no-interest plans, calling them “good examples of how the credit system is being used as a sales marketing tool.”

By applying some smart leverage, though, the savvy shopper can score a little with no- or low-interest payment plans. They can save a few dollars on the plans, if they know something about how the credit system works.

“Credit is one item that is so important to people in this country” but is badly misunderstood, said Steve Brammer, vice president of California Service Bureau, a debt collection agency in Fair Oaks, Calif. “People have the least amount of education about how consumer credit works. . . . Credit is wonderful, if you know how to use it. If you buy what you want and pay off the bill at the end of the month, that’s like using someone else’s money for a month.”

You can, effectively, do the same thing with long-term, no-interest loans. The trick? At the end of the no-interest period, you must be prepared to pay off the item’s entire cost, Brammer advised.

Take that 45-inch, big-screen TV, which, say, cost you $2,400. You could come out way ahead, if you found a 12-month no-interest plan, with $100 monthly payments. By year’s end, you would owe $1,200 on your TV. But if you can pay off that sum in a lump before interest starts to accrue on your account, you could save roughly $240 a year in interest charges, figuring that many retail accounts levy a 20% annualized fee and some go as high as 23%.

For consumers, the variations on the deferred-, no- or low-interest payment plans are getting as complicated as NFL plays.

Mitsubishi, for example, offers the novel “Three Diamond Card,” which is similar to most ordinary credit cards. Consumers pay fairly standard interest charges. But they don’t pay an annual fee, and, when using Mitsubishi’s card, they don’t saddle their regular MasterCard or Visa accounts.

“It’s been a very good marketing tool,” Mike Stapleton, the firm’s national marketing manager, said of the 3-year-old program offered by 80%-85% of Mitsubishi’s 3,300 dealers nationwide. “We specialize in high-ticket items and we felt that consumers needed a little extra help in buying them. They didn’t want to tie up their Visa and MasterCards with $2,000 to $3,000 for one item. We basically just sponsor the plan. It’s run through Monogram Bank based in Atlanta.”

Consumers can use the Mitsubishi card to charge other manufacturers’ products, except when Mitsubishi offers special promotions, such as its latest--0% interest until 1991 on Mitsubishi products. “This no-interest plan helps stimulate sales and promote products,” Stapleton said.

Here’s some additional advice consumers shouldn’t fumble away:

* Scout the opposition carefully. “Money has a cost, and in one form or another, it will be reflected in the sale price of the item,” said McEldowney, who urged consumers to shop around for the goods they’re sure they want at the best price. Don’t buy a brand you don’t want and beware that some retailers, he said, may raise the price if they offer other discounts. “No matter what the store is selling, it has to make a profit on it, so the odds are good that, somewhere, the cost of selling it is going to be passed on to the consumer.”

* Be sure you understand the play. With any long-term financing plans, consumers must “read the fine print,” said Gale Hillebrand, the Consumer Union’s staff attorney in San Francisco. “Look at the way the contract is written and make sure there are no fees or up-front charges--those earned by the lender on the day the loan is approved. And make sure you can pay it off at the end of the time period without any penalties, (because if you can’t) you could have a pretty expensive experience in interest payments. You might be better off getting a short-term loan for 90 days from a credit union or a bank.”

* Develop an overall, credit game plan. While many deferred- or no- and low-interest plans, Brammer said, “are valid and legitimate offers, people have a tendency to get involved with them without thinking. If you know you’re going to get a raise and your financial status is going to change between now and . . . when the interest payments will start, then it’s probably all right.”

* Don’t be overly optimistic about debts you’re tackling. “If you could afford the item when you bought it on a deferred-interest plan, but you then go out and buy something else, what do you do when you get to July and you can’t afford both things and the interest too?” Brammer asked.

Added Hillebrand: “The problem with most deferred plans is that people don’t tend to come up with cash for the payment when the free-interest period is over. If you don’t have the cash on Jan. 1, chances are you won’t have it on March 1, either.”