How Does 0% Create Profit?
Trent wants to know how car companies offer 0% interest and still make money. Dave says it's because you're still paying full price, and there are some bait-and-switch tactics going on.
QUESTION: Trent on Twitter wants to know how car companies offer 0% interest and still make money. Dave says it's because you're still paying full price, and there are some bait-and-switch tactics going on.
ANSWER: To start with, you pay full price for the car, known as MSRP, baby—manufacturer's suggested retail price. We all know that you can get that car a lot cheaper were you to write a check for it. You don't get 0% unless you pay a premium, so it's not really 0%, is it? If I could buy the car for $20,000 but I have to pay $24,000 to get 0%, that's a $4,000 premium, so that's like $4,000 in interest. That's not really 0%. The profits are increased.
The 0% offered by the new car companies is what's known as a bait-and-switch. It's a scam. Ten percent of the people who apply for 0% interest get it. Ninety percent are turned down. Guess who applies for a car loan at the car dealer? Someone who has really bad car fever who has emotionally purchased the car! Then the finance manager comes out to tell you he's sorry you've been turned down for 0%, but he got you approved at 6%. That's called a bait-and-switch. You were baited with the 0, you didn't have a freaking chance of getting it, 9 out of 10 aren't getting it, and you've got to be golden, baby—golden!—to get the 0%. You really do, and you're going to pay a premium.