The highs and lows of long term financing

By extending the term of a loan, merchants are able to attract consumers through the offer of low periodic payments. To further reduce this amount, they give the choice of making payments every two weeks or once a week rather than once a month. In their advertisements, merchants put great emphasis on the amount of the low periodic payments, while playing down essential information such as the amount of the consumer’s total obligation or the total duration of the term, which are often printed in small characters or in abstruse language. Merchants attempt to convince consumers that it is sometimes less expensive to buy on credit than to pay cash, or offer bonuses if they subscribe to a financing plan. Some banks even invite consumers to buy more expensive products than they planned, by extending the term of their loan.

Our impact study shows that consumers are in general not immune to these strategies. The low amount of the periodic payment is one of the most important factors in the consumer’s decisional process. Similarly, many consumers feel they would not have the means to purchase a good or service without recourse to financing; more than half of respondents even claimed that the long-term financing enabled them to buy a much more expensive product than they had originally planned. Others cited the ease of accessing credit and managing payments in their budget as the reasons why they chose long-term financing. In short, long-term financing poses risks of overconsumption and over-indebtedness.

The law, for its part, does not regulate how long a good may be financed. However, certain provisions of the laws of Canada, the United States, France and Australia offer some interesting solutions. These include mandatory information that must appear in advertisements, credit contracts and advertising standards with regard to the display of periodic payments, incentives to purchase goods on credit, the cancellation period, the option of repaying the debt at any time, and the rights guaranteed by law in the event of forfeiture of benefit of term.

These legal solutions are certainly relevant, but they seem insufficient if provisions making the lenders more responsible are not included within the law itself. Beyond setting a limit on the amortization of credit agreements, a truly effective approach toward solving the problems raised by long-term financing must involve heightening the responsibility of the lenders. In this regard, Canada could seek inspiration from responsible lending legislation passed in France and Australia.