Chris Willis, Jason Cover, and Taylor Gess unravel the often-confused distinctions between loans and credit sales in the first installment of our Point-of-Sale Finance Series.
In this crossover episode of The Consumer Finance Podcast and Payments Pros, Chris Willis, Jason Cover, and Taylor Gess unravel the often-confused distinctions between loans and credit sales in the first installment of our Point-of-Sale Finance Series. This episode sheds light on the regulatory nuances that impact the delivery of financial products. From the historical backdrop of Retail Installment Sales Acts to the modern-day challenges of terminology, the conversation offers a comprehensive overview of the pros and cons of retail installment contracts and direct loans. Whether you're a seasoned professional or new to consumer finance, this discussion will enhance your understanding of these pivotal financial structures.
The Consumer Finance Podcast x Payments Pros Podcast – Point-of-Sale Finance Series: The Great Debate of Loans vs. Credit Sales
Host: Chris Willis
Guests: Jason Cover and Taylor Gess
Date Aired: June 5, 2025
Chris Willis:
Welcome to the special edition of The Consumer Finance Podcast and Payments Pros. I'm Chris Willis, co-leader of Troutman Pepper Locke’s Consumer Financial Services Regulatory Practice. Today, we’re going to be giving you the first installment of our special highlight series on point-of-sale finance where we discuss the differences between loans and credit sales, and how those models affect the delivery of this product.
But before we jump into that topic, let me remind you to visit and subscribe to our blogs, TroutmanFinancialServices.com and ConsumerFinancialServicesLawMonitor.com. And don't forget about all of our other podcasts, we have the FCRA Focus all about credit reporting, The Crypto Exchange about crypto and digital assets. We have Unauthorized Access which is our privacy and data security podcast, and of course, Moving the Metal, our auto finance podcast. All of those are available on all popular podcast platforms. Speaking of those platforms, if you like this podcast, let us know. Leave us a review on your podcast platform of choice and tell us how we're doing.
Now, as I said, today's episode is the first one in our special highlight series on point-of-sale finance. Here I'm joined by my colleagues, Jason Cover and Taylor Gess, to talk about the differences between structuring those programs as direct loans versus credit sales. Jason, Taylor, welcome back to the podcast.
Jason Cover:
Thanks, Chris.
Taylor Gess:
Thanks, Chris.
Chris Willis:
As we're launching into the point-of-sale podcast series, it's important for us to start with the basics. Here, we're going to be talking about the differences between direct loans and credit sales and how each one is used in point-of-sale financing. I have to say, the distinctions between these two, I feel like have been subject to sort of an obfuscation effort by the CFPB since its inception because they love, love, love to describe credit sales using the word loans, which has always just driven me up the wall, because they're treated differently under the law.
But Taylor, you're going to tell us all about the differences between the two both legally and practically. So, can you tell us what's the difference between a loan and a credit sale?
Taylor Gess:
Sure. Thanks, Chris. So, I think a loan is pretty familiar to people, but the concept of a credit sale can be a little tricky. We think about a loan as being cash, funds dispersed by a creditor. That creditor could be a licensed lender, a bank, with those proceeds being dispersed to the consumer to purchase a good or service from a merchant loan as something that's payable over time and typically has an interest or other finance charge associated with it as the cost of credit.
So, when we're talking about loans, the loan proceeds flow directly from the creditor to the consumer, and then the consumer makes the purchase at a merchant using those loan proceeds and makes payments to the creditor over time. But in contrast to a loan, a credit sale, or sometimes we call it on retail installment contracts, that's an extension of credit originated by the merchant itself to the buyer for the buyer to purchase goods or services from that same merchant. Here there's no third party involved in the merchant as the original creditor on a credit sale transaction.
Instead of the funds flowing directly to the consumer to finance the purchase, the merchant is receiving a promise to pay from the consumer and payments are made over time by the consumer to the merchant itself. Typically, instead of having an interest charge, the cost of credit for a credit sale, we usually refer to that as a time price differential or another finance charge. When we're in credit sale land, there's also usually a sales finance agency working in the background, and that sales finance agency is the entity that's going to purchase or take assignment of the credit sale from that merchant creditor and becomes the holder of the credit sale. So, that's part of why we think of credit sales as indirect financing and loans as direct financing.
I think the bottom line when we're trying to distinguish between a credit sale and a loan is an accredited sale program, I think of as kind of like a straight line of financing between a merchant and a consumer, where if the buyer wants to purchase a good from a merchant and get credit from that merchant to finance the purchase of that good, so kind of a straight line between the merchant and the consumer.
Whereas in a loan program, we have more of a triangle or maybe even a square. If it's a bank program, the buyer wants to purchase a good from a merchant and goes to a third-party lender to get financing for that good. And then the buyer independently goes and buys that good from the merchant with the third-party lender’s loan funds. There's more of a third party involved in cash proceeds in a loan versus the merchant being the creditor in a credit sale.
Jason Cover:
And Chris, just to kind of further develop and go way back on what Taylor just outlined, I think it's somewhat useful to think about where these concepts came from. So, to Taylor's point, I think most people know what usury is. People love citing to, the Bible says things about usury, blah, blah, blah, blah, blah. We kind of inherently understand a loan involve usury and interest and things of that nature, and we know how that works. And that's kind of one legal theory, right?
But there's a common law theory related to time price deferential and credit sales. The basic theory there was well, a seller of goods and services should be able to charge whatever it wants for those goods and services. That is separate and apart for usury, right? So, I can charge you something or X value if you want to buy it today, or if you want to defer it over time, I can charge you Y value for it. That common law concept was largely outside the context of usury and generally did not have limitations under applicable law, at least until the fairly recent future or fairly recent past, I should say. That came about in the adoption of Retail Installment Sales Acts, or sometimes you'll hear those abbreviated as RISAs.
I think that generally happened in kind of the sixties and seventies, and I think largely spun out of sort of like this department store credit and things of that nature, maybe your old school Sears Roebuck Catalogue and things of that nature. But those essentially codified the concept of a retail installment contract or a credit sale may or may not have imposed limitations on the time price differential that can be imposed or the finance charge. Then, they kind of created a separate avenue outside of the common law, in state law for those concepts. And then of course, Reg Z has encapsulated both, right? So, you have the four-box disclosure for a loan and a five-box disclosure for credit sales that showed the total purchase price and down payments and things like that. So they may seem similar on their fees, but they get there from different ways.
Chris Willis:
Yes, and those ways are very important because they each get sort of separate treatment under various governing laws. They're not the equivalent of one another, and that's why I think it's very important for us to talk to the audience about the differences between them.
So, Jason, having talked about sort of the basics of what differentiates a credit sale from a loan and the sort of regulatory backdrop of Retail Installment Sales Acts, can you talk to the audience about what some of the advantages and disadvantages would be of doing a retail point-of-sale program using a retail installment contract or sales finance type method as opposed to a direct loan?
Jason Cover:
Chris, I think some of the big advantages for adopting a RIC program or operating under RISAs or credit sale laws is that on the whole, they're not as
regulated as a licensed lending program. So, RISAs typically aren't 500 pages in volume, most of them, or maybe not most, but a lot of them just don't have as many requirements. They usually have more flexible product terms. They may have much higher or deregulated rates available. They usually don't have licensing or registration requirements. There are some exceptions and need to be careful here. Sometimes both the merchant may need some kind of license or registration. Sometimes you may need one as the sales finance company. They're generally not subject to as in-depth examinations or oversight at the state level either.
I guess the cons of a retail installment program, there's a greater risk of recharacterization here. And that's generally speaking that, when favorable, like a plaintiff or a regulator may say, “Hey, these aren't really credit sales. These are loans. The involvement of the merchant was really a facade.” There's kind of always that concern because so many of these programs are designed by the sales finance company, they could be recharacterized. There's more confusion, right? We're having this conversation right now. Consumers are less likely to understand that they've entered into a credit sale where the merchant is actually originating the credit and is passed to a buyer. And then, you do have the merchant’s involvement, and they may have responsibilities for federal or state law compliance. Your merchant partners may or may not want that involvement.
Chris Willis:
Taylor, so Jason's just taken us through the pros and cons of retail installment model for doing sales finance. What about the advantages and disadvantages of doing a direct loan?
Taylor Gess:
Yes, Chris. So, I think a lot of the advantages and disadvantages are kind of a flip of what Jason just said for credit sales. So, when we're in the direct loan land, they're a lot more regulated than a credit sale, so the state license lender laws are usually very long, have lots of regulations that go along with them and have specific requirements for disclosures in the loan agreement, how you can advertise the loan, pretty difficult to avoid the licensing and registration regimes under those license lender laws. Those license lender laws include a lot of rate restrictions, fee restrictions, things like that that you need to consider when setting up a program. They might have requirements about payment structures, unequal payments or payment amounts, and lots of servicing type requirements, some of which might be easy to comply with, others could be more burdensome, and then those licensed lender laws do open you up to more examinations.
So then, on the flip side of that, the pros of lending programs, they're less likely to be attacked under those recharacterization theories that Jason talked about. But sometimes we might have this scenario called “dragging the body,” where a consumer is kind of being brought right to the loan by a merchant and then that could maybe result in a loan being recharacterized as a credit sale. If a lot of those cons that we talked about were under the licensed lender laws of a state and there's some potential to have more uniformity or flexibility with a bank program where those certain aspects of those laws might be preempted or apply in different ways.
Jason Cover:
And Taylor, just to elaborate on the dragging the body concept of recharacterization for loans, I think this originated from a car lot that sold cars, and then they just happened to have a licensed lending operation right next to it. And they would literally like drag you over there when you said you needed financing. You could argue that it's really a retail installment sale at that point. We just don't see that as much, and that hasn't been an area of emphasis, so I still feel like there's less re-characterization risk there.
Then one finer point, I guess, here too, there's less involvement from the emergent here, right? Or I guess less need for the merchant to incorporate itself into the transaction since they're not a creditor. So, that may be helpful in establishing a broader program where merchants don't really want to sign up for that level of involvement or risk.
Chris Willis:
So, Jason, let me stay with you and let's close with what are some of the common pitfalls or things that companies should consider when setting these programs up, and particularly in choosing between one of these models and the other?
Jason Cover:
Yes, Chris, I think you kind of hit the nail right on the head when we started talking about this and noting that the CFPB commonly confuses the terms here, right? I think one of the biggest pitfalls is being consistent, particularly if you're choosing a RIC program. I think you need to make sure that your language throughout the application, origination, servicing, et cetera process, matches what you’re actually doing. So, your consumer-facing agreements need to be based on a RIC model. Your marketing shouldn’t mention loans. Your agreements with your merchants, they need to be different and recognize that there’s going to be an origination by the merchant and a person assignment by the DSL’s finance agency.
It's just kind of this general idea of, on some level, form over substance, right? There's a lot of I’s that dot, a lot of T's to cross, and we just kind of commonly see clients screw these things up. I don't think it's anything nefarious. I think the CFPB does it, to your point, that the concepts are similar, but different and you need to be very cognizant of that. Make sure that you have your program aligned properly.
Chris Willis:
Yes, and I think it makes sense also for both the credit provider and the merchant to understand what their relevant obligations are and relevant duties to one another and to the customer are under each of the models, because that'll make the difference for some of them, I think.
Jason Cover:
Yes. Absolutely, Chris. I'm happy to announce that we're planning to have a podcast just on contracting with merchants for these types of programs. So, I don't want to give away too much right now, but that's a very important part of the process.
Chris Willis:
Well, very important. And it's a part that has even garnered some regulatory attention over the years too. So, we'll just leave it with that teaser then, Jason.
Jason Cover:
That sounds good.
Chris Willis:
Well, I think that's a good place to leave this particular podcast. We've done a great job, Taylor and Jason, of introducing the audience to the differences and the pros and cons of a retail installment sales contract model versus a direct loan model. So, let's leave this special series here for now, and we'll pick back up with another very interesting topic on our next special joint episode for The Consumer Finance Podcast and Payments Pros on this topic.
In the meantime, thanks to our audience for listening today. And don't forget to visit and subscribe to our blogs, TroutmanFinancialServices.com and ConsumerFinancialServicesLawMonitor.com. While you're at it, why not visit us on the web at troutman.com and add yourself to our Consumer Financial Services email list. That way we can send you copies of the alerts and advisories that we send out, as well as invitations to our industry-only webinars that we put on from time to time. And of course, stay tuned for a great new episode of this podcast every Thursday afternoon and look forward to the remainder of our series, our special highlight series on point-of-sale finance coming soon to your podcast feed. Thank you all for listening.
Copyright, Troutman Pepper Locke LLP. These recorded materials are designed for educational purposes only. This podcast is not legal advice and does not create an attorney-client relationship. The views and opinions expressed in this podcast are solely those of the individual participants. Troutman does not make any representations or warranties, express or implied, regarding the contents of this podcast. Information on previous case results does not guarantee a similar future result. Users of this podcast may save and use the podcast only for personal or other non-commercial, educational purposes. No other use, including, without limitation, reproduction, retransmission or editing of this podcast may be made without the prior written permission of Troutman Pepper Locke. If you have any questions, please contact us at troutman.com.