I mean, the price of the product is the same, I’m taking a loan for the duration of the credit but paying no interest?
What’s the catch?
I can keep my money making a bit of interest instead of giving it right away and without increasing the price of what I was already planning to buy. When or why wouldn’t I choose 0% credits?
Retailer who offers one of those 0% financing schemes, here. TL;DR: It’s from processing fees paid by the retailer and punitive interest after the 0% promotional period lapses.
The lender makes money in two ways. One, a percentage fee is charged on the financed amount, but it’s not paid by the customer. It’s paid by the retailer. For us it is a little under 2%, similar to the fees most credit card processors charge. So as soon as you make your purchase, the bank instantly skims 1-point-whatever percent off the top. You don’t see this, though. It affects the retailer’s bottom line, not yours.
Two, the 0% interest rate is a promotion which provides specified limited time in which to pay off the balance. If you do not pay the outstanding balance in full by the end of the promotional term, the bank whacks you for a monstrous interest rate on the entire original transaction amount – not just the remaining outstanding balance. In our case this is damn near 30%. Look carefully at the promotional signage and literature. It will always say “0% INTEREST FINANCING!!! for 12 months.” That 12 months is important. That’s the end of the promotional terms, after which you pay aforementioned buttload of interest.
And then, the minimum payments on the bills they send you are obviously deliberately structured to trick you into failing to pay the entirety of the balance by the deadline at the end of the promotional period.
If you’re talking 0% introductory rates for general purpose credit cards, the answer is right there in the name. Those are introductory rates designed to entice you into signing up and using the card, but they’re never permanent. Eventually that introductory rate will expire and you will be left with an interest bearing credit card. Possibly a lot of interest. Even if you pay your bill 100% on time every month without fail, the bank still makes money in percentages and processing fees taken on every transaction from every single retailer where you’ve swiped that card. The bank issuing the credit card can continue to comfortably make money even if no one pays any interest, ever.
Depends on the terms. The better 0% fee deals only charge you interest on the remaining balance if not paid in full. Pays to read all of the terms before signing up.
Oh, I was only aware of credits where the lender sets the amount to be the total exactly spread over the period, those are the only ones I’ve seen and taken, so each month I get a charge for the amount needed to keep up with the credit.
For the rest then it makes sense how they make money, since I’ve had credit cards which don’t show or at the very least hide the amount to not pay interest and only tell you the minimum payment.
They make money on the penalty default rate. They know what the average rate of default is, and they know how many people they plan to sign up. On average they make money. The 0% is to draw large numbers of customers in knowing that some percentage will default and of that percentage they will be able to collect on yet another percentage. This is why the default rate is like 24.99% or something silly like that.
This is part of it.
But also you almost always only get those offers on transaction where they still make comfortable profit on the product if you just treat the interest they’re subsidizing as a discount on the product.
Yes they’re still charging the merchant fees on your purchase which is often overlooked.
I wasn’t thinking credit cards. Those promotional offers are just customer acquisition. They’re short term before they charge the normal interest rates.
I was thinking more like car dealers offering 0% APR, which is really just some discount off the sticker price.
Right its usually either 0% APR or “$XXXX Cash Back” offer and both work out to be a discount off the sale price. I believe the APR is usually the better way to go but it can vary depending on the actual numbers.
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Yeah, and increasing your buying power can talk you into making a larger purchase than you might otherwise have made.
They don’t even have to default.
Most of those aren’t 0% forever. After a year or two, it’s just a regular credit card, with regular shitty interest.
It’s often zero interest and zero payments required for 6 months or a year or whatever. The trick is that if you don’t pay it off within that time, then the interest from the whole period accrues.
In addition to what everyone else in this thread has already covered, the credit card issuers benefit from you having that card in your wallet because they charge the merchant for every transaction. So you’re having the merchant pay the credit card company with every swipe, in exchange for whatever benefits the card provides to you.
This is why gas is sometimes cheaper when you use cash or the gas station’s own card. We pay the credit card companies to use their card on these transactions.
Partially the reason. I’ve seen between $0.10 and $0.30 per gallon more for credit cards even though merchants only charge <5%. At $4.00/gal, 5% is only $0.02 that they’re paying the credit card companies so they’re making extra profit off that too.
5% of $4.00 is $0.20. Think of it as 5 cents per dollar.
Woops I obviously shouldn’t have been doing math before having my coffee.
I’m guessing this is why lots of merchants don’t accept American Express? Probably have the highest rates hitting the merchants
You get what you pay for, though. I’ve had nothing but good experiences as an Amex card holder. You need to live a lifestyle that gives you opportunities to use the system, but you can offset the cost of even the Platinum charge card if you sign up for, and then use, all the perks.
For how I use it, I’d say it pays for itself.
edit to add: their customer service is always stellar, and their disputes department are really effective.
Oh yeah, no discredit to the services to the consumer. On the merchant side though, they don’t want to pay for the higher fees to accept the cards
^^ This guy got chased out of the temple by a furious Jesus Christ /s
I feel more like he’s the guy that gave Jesus the whip.
Usually those are only 0% for a certain period of time. After that, the interest rates are typically higher than average.
So if you utilize it and pay it off completely during the 0% phase, they really don’t make any money. They make money when you carry a balance past that, or if/when you continue using that line of credit after the 0% period has ended.
That’s my understanding, anyway, as I have seen 0% APR offers, but they always are for a limited amount of time.
That, or there’s some kind of massive penalty if you miss a payment or something. Definitely read the fine print lol.
0% interest offers show up fairly frequently in the USA, often as general-purpose credit cards, or for car or furniture payments, in addition to the many buy-now-pay-later services that allow financing almost anything. However, the motives for offering 0% are slightly different for each of these products.
But answering the question directly, a 0% offer is beneficial if you were already going to make the purchase and would finance it. Cheap credit makes it easy to overspend, since the payments will be “tomorrow’s problem”. For people who can afford to pay for something in full, it might still be beneficial to finance with 0% just to conserve cash on hand. But the tradeoff is having to service the debt with regular payments; missing one payment can cause the debt to resume at an exorbitant rate. It takes a decent amount of financial discipline to make a 0% offer work in your favor.
Going back to why 0% offers even exist, I’ll use furniture and cars as they’re the historic examples. Furniture is expensive, whether it’s a sectional sofa or a queen-size bed with frame and storage. There’s also a sizable markup for furniture, and competition between furniture stores is strong. Thus, to help entice people to buy furniture, sellers will offer 0%, outsourced to a loan company, with the loan subsidized by some of the profit margins.
For cars, the equation is slightly different. Sure, cars are an order of magnitude more expensive, but that also means the opportunity cost for dealers to offer 0% is correspondingly larger. Instead, 0% financing for cars is almost always subsidized by the manufacturer, not the dealers. This is a financial and business strategy that allows a car company to create more sales in a given quarter, if perhaps they need to meet certain year-end targets but are reluctant to reduce their list prices.
0% car loans induce more sales fairly quickly, but will draw on the company coffers in the years to come, because the loan company still wants their cut to be paid by someone. Consumers will usually benefit from these offers, as it’s rare for people to buy a new car outright.
It’s my opinion that if a car company has to subsidize loans to move their product, that’s a tacit admission that their product is wrongly priced or the competition is better. I would take this into consideration, although it wouldn’t necessarily carry the day when considering a purchase. After all, car payment interest is not insignificant.
Often car companies offer a rebate or the low rate. If you do the math the rebate is often for more than the difference in interest payments between the low and normal rate.
Absolutely, it is essential to always run the numbers. I was once offered a sizable rebate if I accepted a non-0% car loan, but no rebate if I paid cash or had my own financing. Since their loan had no early-repayment penalty – and I demanded this in writing – I accepted their loan and paid it off upon the first statement.
My suspicion is that that sort of offer was to boost the commissions earned by the loan brokers, rather than to move cars. Or maybe both. Who knows.
