I’ve always wondered about 0% interest and how companies made money on it. Essentially, 0% means you pay no extra on money borrowed.
If you borrow $1,200 and paid it back monthly, you’d pay $100 a money for one year. You could put that $1,200 in a high yield savings account and make some cash for doing nothing. It’s free money. So how does a company make money on these offers?
In the last decade (2000ish to 2010ish), I used to received offers from credit card companies declaring 0% for 24 months including balance transfers with NO FEES. These offers were literally like someone saying, “let me give you $$$$, you pay no fees, no interest and you just pay me back in 2 years.”
Those offers were clearly made in hopes that you would not pay back in X years and they could land the interest hammer on you. I guess if 1 in 10, just making stuff up here, fails to repay, these credit card companies make a decent return. I _guess_ that could be how they made money back then.
Now, 0% offers like that don’t exist anymore. All 0% offers include balance transfer fees, so credit card companies can make a guaranteed % on the money they loan out. If you were trying to make some free money, it’s not worth it anymore with that transfer fee. Good things never last.
I tried to think about 0% in terms of cars because so many are currently offering 0% interest for 4, 5, or even more years. That’s actually pretty significant, but how do they make money? With the online purchase system implemented at many dealerships now, it becomes clearer.
Many dealerships offer incentives, but these incentives all vary based on financing and other nuances in the transaction. So, if you take a 0% offer, you give up the $5,000 “instant cash”. In other words, if you take the 0% offer, you are paying a $5,000 fee on the 0% loan they are giving you.
When you calculate the % interest on the fee you’ve just paid, it typically works out to a pretty high %.
And THAT is how these dealerships give out these 0% loans. Next time I’m in the market for a car, I’ll rethink that tempting 0% loan to find out what “instant cash” I might be giving up to get that loan.