Credit Easy but Costly in Inner City : Buyers Tend to Look at Monthly Payments, Not High Rates
Signs inside Cestra Furniture in South Central Los Angeles promise shoppers “90-day financing; no interest,” but customers who take longer to settle their accounts could end up paying one of the highest finance rates in California--a whopping 27% on items costing $1,000 or more.
Inner city retailers, such as Cestra Furniture--a small, nondescript store near 55th and Broadway--say they must charge high rates to offer credit to people who, for the most part, do not have bank accounts or carry credit cards. They say the higher rates help cover losses that inevitably result from granting credit to consumers whom most lenders don’t consider credit worthy.
Surprisingly, the stiff terms don’t deter many customers. Shoppers and store owners agree that for those buying items on time in the inner city, the size of the monthly payment, the selection of merchandise and special conveniences--such as Spanish-speaking sales clerks--are more important than the amount of the finance charge.
“People will buy if they can get easy credit,” Cestra owner Thomas Chavez said of his customers, most of whom, he says, are black or Latino and come from as far away as Downey, Inglewood and Carson.
Yet, while credit may be more freely available at some stores, interest rates have jumped dramatically from the 18% level California set before it lifted credit interest rate ceilings Jan. 1, consumers groups say.
While interest rates at 12 major retailers--including J. C. Penney, J. W. Robinson’s, May Co. and Nordstrom--rose just under 2 points to 19.8%, rates at some inner city stores jumped to as much as 27%, according to a study released last week by the California Public Interest Research Group.
The California Retailers Assn.--which lobbied for removing credit interest rate ceilings--had predicted that “consumers could be expected to benefit from a free (credit) market.” And in its own forthcoming study of 39 California retailers, the association reports that two-thirds of the retailers offered annual credit rates of 19.8% or less and that no rate higher than 24% was documented.
But Henry Holmes, a consumer activist at CalPIRG, said a member of the group posing as a buyer was offered 27% by a finance company that Cestra sends credit applications to.
Chavez of Cestra said he uses ITT Financial Services Co. of Los Angeles but added that he has nothing to do with the rates they set. “They take the application (from the customer) and send me a check for the balance due.”
Inquiries to ITT were referred to the regional manager, who did not return several phone calls.
Jose Saravia, a 39-year-old maintenance man, is largely unconcerned with interest rates.
‘Monopolistic Pricing’
He can’t recall what rates he’s been charged over the past six years, even though he has bought a stove, television, dining room table and a cabinet on time at Dearden’s at 7th and Main. He said he patronizes Dearden’s because he was unable to easily obtain credit at other stores he visited.
“Everybody (else) wanted a big deposit” on credit purchases, Saravia said.
CalPIRG, however, contended in its report that the higher credit rates stemmed from “monopolistic pricing” of firms taking advantage of consumers with limited transportation to shop elsewhere.
Although many customers who patronize inner city merchants are poor, with spotty employment records and little or no other access to credit, many disputed CalPIRG’s presumption, saying they they often do have access to transportation and try to shop around.
Greg Jones, a gas station attendant who lives on 54th Street near Cestra Furniture, said neither he nor anyone he knows of has ever patronized Cestra Furniture in the three years the store has been open. Jones said he has been in the store to look but added that the furniture, which ranges from $50 for a chair to $3,250 for a sofa set, is too expensive.
“I was looking for a sofa one time but I can get a better deal at one of those Korean (-owned) furniture stores . . . on Crenshaw or at the swap meet,” Jones said.
Yet consumers who are looking for “deals” may find it difficult to make fair interest rate and price comparisons.
“The issue facing retailers is, do you make your money charging what the market will bear or do you cover the expense of granting credit by charging interest rates that reflect the risk of granting credit?” said Don Hoffman, general manager of Central Furniture, TV, Appliances.
Not a Lot of Cash Business
Central chose to increase its interest rates somewhat. The store raised credit interest to a uniform 19.2% from a two-tiered level of 12% for outstanding balances above $1,000 and 18% for those below. “For the most part our consumer is a credit consumer. They shop here out of a basic need to buy merchandise on time; we don’t have a lot of cash business,” Hoffman noted.
Valentino Lopez, a 24-year-old Los Angeles carwash attendant, is typical.
Over the years, he’s purchased a TV, a stove and several other items on credit at Central and remained a loyal customer despite the increase in credit interest. Last Saturday he bought a $350 “boom box” portable stereo and agreed to pay monthly installments of at least $40 with the outstanding balance financed at an interest rate of 19.57%.
Lopez said his main consideration in making his purchase was to keep his monthly payment below $100. “Credit is hard to get” at other places, he explained in Spanish. And salesmen at most large furniture retailers in the area don’t speak Spanish.
Oscar Alfaro, a 33-year-old shipping clerk at Coast Magnetics, said he tried to obtain credit at a Los Angeles Sears Roebuck & Co. store but could not qualify.
“I shop around but I always come here because of easy credit,” Alfaro explained.
Despite the convenience of Spanish-speaking sales clerks and easy credit, some merchants say there remains a psychological barrier of 20% credit interest that even unsophisticated consumers are still unwilling to breach.
“Personally I don’t want to see our interest rates go to 20 or above,” said one Los Angeles merchant, who declined to be identified. “So when that (sales) contract prints out, I want that number to be 19.99%, 19.98%. I think there is a point at which that figure will become apparent to our consumer if they shop at another store. So I would like to see another store go over the 20% mark first.”
