No matter what the economy is like, many businesses see the benefits of allowing customers to make installment payments. With low interest rates, installment sales contracts have become an important tool for companies looking for ways to boost sluggish sales.
In some court cases, consumers' installment contracts have been ruled unenforceable under the "doctrine of unconscionability." This involves a contract so unfair and one-sided that it literally "shocks the conscience of the court."
Before rushing in and offering consumers the ability to buy products or services "on time," companies should understand that both federal and state laws closely regulate installment sales contracts. Failing to meet the terms of these laws can be costly.
In one case, Service Corporation International, the world's largest funeral industry company, settled a consumer lending class-action lawsuit in 2003 that arose from SCI's use of installment contracts for a potential of nearly $3 million.
In the lawsuit, filed in Miami, consumers claimed that under the installment contract used to purchase SCI's "Memorial Plan" SCI charged illegally high processing fees, and failed to disclose finance charges, the amount financed, and the annual interest rate to consumers. In addition, the suit alleged that SCI failed to provide consumers with copies of the paperwork as required by law.
Although SCI admitted no wrong doing in the case, it did agree to pay $50,000 cash to consumers with claims under federal law. The company also agreed to provide coupons worth $175 to some 16,000 customers with claims arising under state law. Finally, the company agreed to an injunction, which bars it from continuing to use the contract in question and lowers the processing fee in the future from $50 to just $10.
While laws vary from state to state, companies should always keep in mind that installment contracts must provide full disclosure of the terms of the loan. The annual percentage rate (APR) of the loan must be specified. Finance charges must be disclosed, and the amount financed (the amount of the loan) must be specified. In addition, added fees for processing, etc. must never be so high that the total cost of the loan is so high that it runs afoul of state usury laws. Care must be taken when drafting a company's contract for installment sales that all necessary disclosures are conspicuously made.
In addition to these consumer credit laws, there are separate federal and state laws involving the advertising of offers involving installment payments.
While full disclosure of the terms of the lending agreement is of paramount importance for any company considering installment contracts, it is also important to remember that many states have additional requirements. For example, some states require that consumer installment contracts be written in clear, concise, plain English. Some even specify the size of the type that must be used when printing such agreements.
Don't bury important aspects of lending agreements in legal jargon and "fine print." Information should be disclosed clearly and conspicuously so that consumers can evaluate the merits of an offer and make an informed purchasing decision.
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