Caveat Venditor

Installment buying has long been accepted as one of the cornerstones of the U.S. economy, but in Nebraska that cornerstone has been all but crushed. As a result of decisions by the state's Supreme Court, Nebraskans who bought anything on the installment plan during the past four years have a legal right to keep their purchases and quit making payments--no matter how much they still owe. According to some legal authorities, purchasers are even entitled to sue to recover payments already made.

Some Nebraskans are doing just that. A man and wife who bought $18,000 worth of equipment early this year to start a coin-operated laundry have stopped paying the installments and are trying to get back their $500 down payment. State Senator Terry Carpenter, remembered for proposing an imaginary "Joe Smith" for the Republican vice-presidential nomination in 1956, is suing to recover $1,300 he paid down on $7,000 worth of cash registers.

Thunderous Backfire. This strange something-for-nothing situation arose out of a legal tangle over interest rates. Nebraska has an old law setting 9%* a year as the maximum permissible interest on a loan. But added risks and extra paperwork make installment loans unprofitable at 9%. Most states with interest-rate limitations also have special laws permitting higher percentages on installment purchases. Nebraska merchants and lenders lobbied for such a law, and in 1959 they got one. Without repealing the 9% overall limit, the legislature passed an installment-sale statute allowing true yearly interest rates as high as 30%.

Last June the 1959 law backfired thunderously. The state Supreme Court ruled that the law violated the state constitution, which forbids the legislature to set a "special" interest rate applicable only to specific kinds of transactions. Any seller who had charged more than 9% on an installment sale, said the court, forfeited the legal right to compel the purchaser to pay. The legislature hastily passed a substitute law, with altered rates and revised wording, but a few weeks ago the Supreme Court struck down that effort, too.

Nonlegal Threat. While delighting some installment debtors, the court decisions jolted the state's economy. Several large finance companies have already withdrawn from operations in Nebraska. Sales of new and used cars have slumped for lack of financing. Last week state legislators proposed more than a dozen different bills designed to straighten up the mess. One remedy advocated by many Nebraska businessmen is to change the overall limit from 9% to 12%, which would make it possible to finance future installment sales profitably. But that would still leave past contracts in a state of legal chaos.

Whatever the legislature finally does, Nebraska merchants and lenders have a nonlegal threat of their own to brandish at installment purchasers who halt payments or bring lawsuits: they won't extend any more credit. Growled an Omaha banker: "Those who take advantage of these court decisions better have the cash next time they want to buy something."

* Although in many installment contracts the apparent interest rate is lower than 9%, the true rate is almost always higher. If a man borrows $100 and pays the lender $109 a year later, he is paying interest of 9% a year. But if a $100 borrower pays a total of $109 in twelve monthly installments, he keeps reducing the amount of the loan as he goes along, and the true interest rate amounts to about 18%.

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