Consumer Credit

The law might regard credit differently, depending on whether it is offered by a vendor (seller). When an appliance store gives credit to customers who buy such items as washing machines and refrigerators and pay for them over a certain period of time, this action is known as vendor credit. When a consumer borrows funds from a finance company to pay for appliances, this action is known as lender credit, since the finance company lends but does not sell.

Some states exempt vendor credit transactions from the provisions of state USURY laws. A vendor or a lender can charge the consumer interest (a fee for the use over time of borrowed money). In the past, usury statutes restricting the legal interest rate have ordinarily been applied only to lender credit. The difference in the treatment of lender credit and vendor credit is based upon the assumption made by law that vendors are able to adjust their prices to allow for the period during which they await payment. If, for example, the vendor's time price was excessive in that it allowed for a high interest rate, then the consumer could opt for payment of the cash price. Courts believe that competitive pricing will prevent vendors from charging too much interest when they extend credit. It is the seller's right to determine how to reduce the time price to encourage consumers to pay cash for goods.

Some courts have found since 1970, however, that these principles have no application to revolving charge accounts because department stores do not charge consumers less for paying for items in cash. There is one uniform purchase price, regardless of whether the sale is a credit or cash transaction. Both finance charges and tax are computed on the basis of the cash price.

In cases where courts have indicated that state usury laws must necessarily be applied in the vendor credit extended through revolving charge account customers, state legislatures have enacted statutes to increase the legal rate of interest that may be charged on such accounts. Most consumer credit cannot exist within the usury law limits; therefore, the pattern has been to enact laws that permit special higher finance rates for vendor credit to consumers.