«Dr. Robert D. Manning Caroline Werner Gannett Professor of Humanities Rochester Institute of Technology Hearing on “The Role of FCRA in the Credit ...»
To Ann, six months without payments seemed like an eternity and interest free, too. She couldn’t wait to feel the plush new carpet under her bare feet. When the first bill arrived, she did not realize that the free financing clock started ticking on the date of the sale contract NOT the day of installation. So instead of six months of no payments it was really only five months. When the second bill arrived, Ann did not understand why there was a monthly finance charge of $20.88 and simply reminded herself that it was interest free. Afterall, the Home Depot salesman assured her that there were no finance charges on the purchase. And, everyone was complimenting her on how nice the new carpet looked.
It was only after six months had passed that Ann understood the financial realities of the “promotional offer.” The accrued interest charges of $125 was now added to the $1,619 sale price at an annual percentage finance rate (APR) of 15.48 percent. With a minimum monthly payment of $25, it was manageable but will require 15 years to pay it off assuming no additional charges. And, the conveniently low minimum payment obscured the total cost of the carpet at the end of the 15 year period--$4,489. Needless to say, no one mentioned that increasing the monthly payment by only $10 would cut the payoff period in half to only 7 ½ years and thus reduce the final cost to “only” $2,811.
Or, that lowering the APR by only 3 percentage points (12.48%) would reduce the payoff period to 10 ½ years and the total cost to $3,124.
Ann was interviewed for this article in March 2003 and requested that her last name not be identified.
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