Optimality and the Cutoff of Defenses Against Financers of Consumer Sales

Abstract

When a consumer pays in cash or by check and the seller performs improperly, the consumer must initiate a lawsuit in order to recover his payments, and he cannot recover them or damages until the suit is concluded. Courts and commentators seem untroubled by these disadvantages which attend cash purchases, apparently for two reasons: First, people who pay cash present unsympathetic cases; they have money, and its presence is usually associated with an ability to take care of oneself. Second, cash sales are cheaper than credit sales because the investment income forgone as the result of a cash payment will usually be less than the cost of credit. Buyers who purchase on credit are, of course, disadvantaged by having to pay credit costs, but in the event of improper seller performance they can withhold further installment payments; they therefore have a "weapon" to induce performance, they need not initiate law suits, and they can retain at least part of the price during the duration of an action. When, however, a credit purchaser has his note transferred to a finance company, or he waives sales defenses he may have against the seller as against a third party who has financed the sale, or he uses a bank credit card to make the purchase, state law often provides that if the seller breaches, the buyer must continue to make payments to the finance company or bank, and must proceed against the seller. The intervention of a third party, called here the financer, thus visits on the credit buyer the same disadvantages which attend cash purchases and it does this for those consumers who lack the resources to pay cash and who must nevertheless continue to bear the higher costs associated with credit buying.