No payments! No interest! For 12 months!

ou've seen the words splayed across newspaper ads and noisily pitched on radio and TV commercials. But that little voice in the back of your head whispers, "There's got to be a catch." Well, that little voice is right--there is a catch, a big catch. It's the small but powerful absence of the word IF.        If you don't pay your bill in full by the end of 12 months, the lender charges you all the interest that's accrued during that period. Not just the interest on your remaining balance, but every penny of interest from the date you signed the contract. A similar too-good-to-be-true headline would read, "No fat, no calories," and in the fine print reveal ... If you don't eat the food. Confused? You're in good company. If you wish things would change, they're starting to.

Misleading come-ons In early 1995, Texas Attorney General Dan Morales' office started investigating these ads from various retail chains and reviewing consumer complaints. Morales determined that consumers could be easily misled when a retailer advertised "No Payments, No Interest for One Year."        "Many consumers don't understand all the terms and conditions of no-interest financing programs," says Wisconsin Attorney General James Doyle, one of several attorneys general who joined Morales in the investigation. "Many falsely believe that they won't be charged any interest on their purchase. However, if you don't comply with all the terms and conditions of the financing plan, you will face high interest charges, which start on the day you make the purchase."

New rules Attorneys general from eleven other states (Colorado, Georgia, Indiana, Louisiana, Minnesota, Nevada, New York, North Dakota, Pennsylvania, Rhode Island, and West Virginia) joined Morales and Doyle in the investigation. In September '96, the states obtained voluntary agreements from Best Buy Corp., Eden Prairie, Minn.; CompUSA, Dallas; Montgomery Ward, Chicago; and Tandy (which owns Radio Shack, Computer City, McDuff, and Incredible Universe), Fort Worth, Texas.        These corporations agreed to pay the states $925,000 for attorneys' fees and investigative costs, and to reform their advertising programs to clearly disclose:

That the consumer must pay the full purchase price within the zero-interest period to avoid an interest charge; How many payments, if any, the consumer must pay during the zero-interest period, and the approximate minimum amount of those payments; That if the consumer fails to make any required minimum payment when due, or fails to pay the purchase price in full by the end of the zero-interest period, that the lender will assess the customer all interest accruing on the product during the zero-interest period; The amount of any minimum purchase required; and Any specific brands or products to which the offer is limited.

Advertisements also must disclose the APR (annual percentage rate) the lender will charge if the consumer doesn't comply with all the terms of the zero-interest financing plan. The companies must provide in-store information about zero-interest financing programs to customers, and clearly disclose on their billing statements the amount and due dates of any required payments. Merchants also must tell consumers if they're required to pay interest charges if they don't make the required minimum payments by the due date.        Morales and Doyle say zero-interest financing investigations will continue, but they hope the example these four companies set will serve as a model for the entire industry.

The cost of free financing Economist Steve Rick of CUNA & Affiliates, Madison, Wis., helped us see how this might work for someone buying a $1,900 computer. If you sign up for the no money down, no interest, no minimum payments for a year and don't come up with the cash by the due date, using a 22.65% APR, you'll owe $430 in interest for the first year. The $1,900 computer now costs $2,330. If you need another year to pay off the entire balance, you'll pay $218.84 a month for principal and interest, including an additional $295 in interest for the second year. Your computer ultimately costs $2,626--$726 more than you bargained for.        However, if you buy your computer using a 12.5% APR credit card or a 12.5% personal loan, you would make 12 monthly payments of $169.32, including $131 interest, for a total of $2,164.

The way things work We wondered just how well the new agreement the attorneys general achieved was working, so we gathered advertising inserts from a recent Sunday newspaper. The front page of one of the targeted corporation's ads touted no payments, no interest, and no money down for one year. It listed the items you had to buy, and the applicable minimum purchase prices to qualify for the zero-interest financing. It also contained this wording: "Interest will be charged to your account from the date of purchase if not paid in full by January 1998."

The front page text directed readers to an inside page for "important consumer financing information," which stated that the lender would charge no interest or finance charge if the consumer paid the bill in full by the plan's expiration date. This paragraph told consumers what merchandise and prices were included in the 12-month plan; it also stated that the seller required a minimum purchase of $299 for six-month financing, and that no minimum purchase was required for 90-day financing. It listed a 22.65% APR--no small change--and said that APRs may vary. It also stated that a minimum monthly finance charge of 50 cents may apply.

This certainly was a lot to read, but we got the picture. Especially unsettling was that sky-high interest rate--looming like an axe waiting to fall on forgetful heads. Next, we plowed through some ads for local chains not included in the agreement to see how they measured up. They were on board, listing similarly worded disclosures.

So now you at least will know what you're getting into. But you still might not appreciate how much it will end up costing if you miss a minimum payment, or don't come up with the cash by the end of the free financing period. Before you sign, have the sales associate figure out the amount of the minimum payments, if applicable, and how much interest you'll have to pay if you miss any deadlines. Then check with the credit union to see how much the same purchase would end up costing if you used your credit card or took out a loan. Use the payment method that costs the least. It's often said, "What you see is what you get." Well--now that you can see what you're getting, you might not want to get what you see.

Columnist Franny Van Nevel is a consumer advocate and writer. She formerly was director of consumer information for the Wisconsin attorney general's office for 12 years, and is a frequent contributor to Woman's Day.

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