Buy Now, Pay (or regret) Later

Usually on Black Friday I write about perspective – that any deal on electronics is not worth the life of the person trampled in the stampede. Another aspect of perspective is appreciating what we have and not constantly yearning after more or bigger or newer. The problem is that understanding the difference between wants and needs is only a first step. It must be followed by the discipline not to ignore reality by buying something anyway, especially something you can’t afford.

What seems to be catching on today is a new gimmick called point-of-sale installment loans. “This holiday season, it's not enough to spot a great Black Friday deal on a big screen TV or a sweater. You need to consider whether you want to take out a loan at the checkout, too.” 

That’s right; shoppers no longer need to go to a bank for a loan to buy something they can’t pay for. An installment loan at checkout breaks the cash register receipt into a number of easy monthly payments. That service is now available at Wal-Mart and at many other retailers, both brick-and-mortar and on line. And installment loans are expected to be “hot this holiday season, as retailers attempt to drive sales and shoppers demand easy-to-understand credit.” Retailers are partnering with finance companies to give shoppers these loans, even to people who might not qualify for regular credit cards. Instead of paying at the time of purchase, shoppers can take the items home and pay in 3, 6 or 12 monthly payments.

This is not a new idea, but was usually limited to big-ticket items. Furniture stores have used it for years. The problem is that the eventual monthly payments add up to more than the original price – sometimes 20% or 30% more. 

Not paying cash at checkout is not new either. Credit cards made that possible years ago, and both arrangements involve interest. But shoppers generally ignore the interest in light of the convenience and recognize some advantages over credit cards. Installment loans have no late payment fees, which are a big revenue source for credit card companies, and people tend to like the idea of a predictable, fixed amount each month.

It really is the same idea as a mortgage or car payment, but now the idea is moving downstream to less expensive purchases. Another source says installment plans have a “wide appeal but resonates most strongly for debit users. Four-in-ten would consider using an installment plan for everyday purchases like groceries and household items.”

An American Banker article has another explanation for the trend; “many younger Americans are uncomfortable carrying credit card balances, partly because they saw their parents struggle with debt during the financial crisis and prefer the more certain repayment terms of installment loans.”

This brings up a few issues. First, the financial problems of the parents of younger Americans were not the fault of the credit card. They were problems of discipline and perspective. Going into debt in a different way is no guarantee of success. Since installment plans have no late fee, what do they do instead, send debt collectors or repossess the sweaters and Christmas toys? (This is not addressed in any of the stories.)

In effect, this is just another marketing ploy to get people to spend money they don’t have. The example in one of the articles was of a woman who bought tires from Wal-Mart. She was all right with paying the $644 in three monthly payments of $224, but she “doesn't remember the interest rate.” (It’s about 18% APR.) In this case, tires were probably a necessity, but sweaters, purses and toys?

All this is happening while U.S. household debt, according to Motely Fool, reached $13.54 trillion earlier this year, “an amount that has risen for 18 consecutive quarters.” 

Wake up America; debt is debt! Have a happy Black Friday, but don’t do anything foolish.