The Interest Tail Wags the Profit Dog

• Publication year: 2014
• Author: David Cook

The Interest Tail Wags the Profit Dog

David Cook

David J. Cook is the senior attorney for Cook Collection Attorneys PLC. and specializes in the enforcement of judgments and collection of debts. Mr. Cook has been practicing in this area for the past 38 years. Clients frequently consult with Mr. Cook over the terms of a settlement agreement in light of the risk of default, insolvency and potential enforcement. He is pleased to announce the publication of The Debt Collector's Handbook: Collecting Debts, Finding Assets, Enforcing Judgments, and Beating Your Creditors [American Bar Association, June, 2014].

Cabaret taught us that

"Money, money, money, money, money, money, money Get a little, get a little Money, money, money, money Mark, a yen, a buck or a pound That clinking, clanking, clunking sound Is all that makes the world go round It makes the world go round."

Hamlet advised

"Neither a borrower nor a lender be; for loan doth oft lose both itself and friend, and borrowing dulls the edge of husbandry."¹

Jerry Maguire commanded us to

"Show me the money."

Wall Street lectured everyone that

"Greed is Good."

Interest makes the world go around because it coerces parties into paying their debts on time. Interest turns friends into foes. Interest makes the borrower toil twice as hard to pay off the debt because interest puffs up the debt. If the borrower cannot show the money, the lender gets richer. If greed is good, interest is better. Interest is money. Interest is the boogeyman of any contract because it compels a party to pay on time.

Are you interested? Do you have any interest in this article? Might I interest you? What are your interests? You will find this article very interesting? Very interesting! Interest makes money fall from the sky.

If Elizabeth Barrett Browning had been an attorney, and not a poet, she would have penned, "How can I charge you interest? Let me count the ways."

Autos, home furnishings, jewelry and luxury items, high-end consumer electronics, mid-level consumer products (as seen on TV), and virtually all other consumer goods can be purchased on an installment payment plan. Interest charged to these purchasers (or borrowers) delivers staggering profits. Consumers pay interest when they use a credit card, buy the product through an installment plan offered by the merchant, or charge the purchase on a merchant's branded credit card. Installment payments that bear interest enable the consumer to purchase a product by making seemingly modest, but endless, payments.

Consumers purchase goods based on their discretionary income, without regard to the true cost of paying over time. Department stores offer in-house credit cards which bear rates of interest exceeding 24%, plus penalties which are imposed upon the slightest default. Cashiers sign up customers at the cash register. Household furniture stores offer "easy payments," which conceal exorbitant interest which doubles the purchase price. The interest charges on these ubiquitous consumer purchases equal or exceed the purchase price of the product itself.

Interest is a gravy train that might span years or even decades, particularly for real estate loans. The very long interest tail wags the profit dog in consumer purchases. Some products are sold at near-cost prices just to loop the customer into a very long stream of interest-laden payments. The longer the stream, the more interest is charged. Call interest the razor blade to the razor blade holder. The old saw is that the merchant gives away the blade holder for free to sell the expensive razor blades. Interest is profit and profit is interest.

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Consumers fear interest. Forget the silver bullet or wooden stake to the heart, some rates of interest would frighten Dracula to death. Frankenstein cowers in the face of his credit card bill. Loathing consumer debt, the Werewolf pays cash. That little plastic card is Kryptonite to Superman. Mortal consumers strive to pay on time, lest they face finance charges that bury the consumer in endless debt. Worse, the defaulting consumer faces an ugly and expensive ding on the credit report. Consumers shop aggressively for low-interest cards. Consumers move balances from card to card to lock into a lower rate. Interest is the cattle prod to get people to pay on time.

Counsel Confronts Interest. Interest confronts Counsel. Hello.

Certainly, you'd think that attorneys can avoid the nasty bite of punitive interest when running a law office. Think again: many firms find themselves tethered to a bad deal that bears a horrendous rate of interest. The main culprit is leasing office equipment. The grand villain is the copier. Gone are the days of analogue copiers that habitually broke down, chewed through toner, and habitually jammed, and for which the English language offered an endless supply of profanity. Analogue copiers rest in peace alongside typewriters, belt-driven transcription machines, and rotary dial phones. Post digital, attorneys have acquired digital copiers, whose claim to fame is that all copies are identical from snout to tail.

Leasing enables the vendor to make the digital copier affordable. The sale presentation includes the "How much can you afford a month," or "$300.00 a month will launch you into the digital age," or "$500.00 a month will insure crystal clear quality, free upgrades, and flawless maintenance." Before going any further, I note that a lease is another form of capital financing. Assuming that you accept the lease deal, the vendor sells the equipment to the leasing company (which might be captive or stand-alone) who pays the vendor for the full purchase price, and writes up the lease. What is wrong with this picture? The lessee is paying the leasing company an effective rate of interest ranging from 7% to 10% at the low end to up to 25% at the high end. Worse, you are paying full invoice price for the copier. The "invoice price" is a fictitious number anyway, because office equipment is sold competitively.

Office equipment is without...