Can hidden credit charges be forced into the open?

DAVID LEWIS STEIN December 3 1960

Can hidden credit charges be forced into the open?

DAVID LEWIS STEIN December 3 1960

Can hidden credit charges be forced into the open?


Few small debtors really know, even though all buy-now-pay-later schemes and all small loans are governed by federal legislation. The price of paying later is hidden in a baffle of business terms— carrying charges, discount rates, insurance premiums — that serve largely to confuse the man who owes them.

Senator David Croll is out to make some changes. Croll has promised to press again at the current session for his Financial Disclosures Bill, which ground to a standstill before the Senate adjourned this summer.

The bill, strongly backed by the Canadian Association of Consumers, would force all lenders to say how much they charge for a loan in terms of simple annual interest.

They certainly don’t now. In a week of shopping in an assortment of Toronto stores, I found out how confusing credit charges can be.

* In the Chesterfield Shop, near Yonge and College, I looked at a chesterfield and chair on sale for $349.99—let’s say $350. A salesman told me 1 could have it for $35 down and 24 monthly payments of $16.50. After some rapid calculation, I pointed out that this was a total of $431—that I would be paying $81 interest. This interest, on my unpaid balance of $315. was 25'/2% for

two years. Oh no. the salesman said, consulting a finance company chart, the interest was only 23%. How come? I said. That’s what it says, he said, looking again at the chart. I reasoned that the extra charge was some sort of insurance, or that the finance company computed its interest on the whole price of the chesterfield and chair, and left.

^ At Simpson’s, I priced a bedroom set at $475. With 10% down and two years of monthly payments, 1 would pay 15% of my unpaid balance in interest. But the surprising thing was. no one mentioned interest. The 15% was described only as a service charge.

* At S&B Appliances on Yonge Street, the owner quoted a $29 down payment and 24 payments of $10.96 for a hi-fi set listed at $229. Credit here would cost me 31'/2% of my unpaid balance.

* A jeweler offered to sell me a $175 ring for $!75, stretched over 12 months. He did his own financing.

That was the catch, 1 discovered. With the exception of the major department stores, retailers "sell” the customer's note to finance companies—in Toronto, mostly to the Gibraltar Discount Company, Seaboard Finance, or the Industrial Acceptance Corporation. Most salesmen simply read the payments from

a chart, and don’t understand themselves exactly what you’re paying for.

At the head offices of IAC, an officer who asked to remain anonymous told me his company doesn’t charge “interest" at all. They just collect a “service charge” that covers their own overhead and profit.

“The public only understands the number of dollars they pay anyway,” he said.

What about the banks? I applied for a personal loan of $500 from the Bank of Commerce. I was told that all loans were for standardized amounts (“to reduce bookkeeping costs”) and that I would have to sign for $540 from which 6% interest would immediately be “discounted.” That meant I would get $507.60 in cash. 1 would repay $45 a month into a savings account. This account would pay the regular bank interest but life insurance costs would be deducted—which would eat up most of the interest. At the end of a year, the $540 1 had saved would be used to repay the $540 1 had borrowed.

Six percent? Sure, but figured on $540. while I'd got only $507.60.

And even that 6% is figured in a different way from normal bank loans. As Jules Newman, a Toronto chartered accountant, explained it: “If you borrow $500 on an ordinary bank loan at 6%

and repay it in 12 equal monthly installments. you’ll have the use. over the year, of an average of about $270 and you would pay interest on that amount. But under these personal loans you're charged on the original amount, so the true interest rate would be approximately 11%.’’

Will Croll's bill — if it passes (and don't bet it will)—change all that? Not in essence. It’s not designed to change credit charges, only to bring them out in the open.

Meanwhile, says Croll, “the consumer is being sliced up like a piece of cheese, and he doesn’t even know it."