How Do 0% Financing Deals Make Money?

Richard asks how 0% financing deals work and how they make money. Dave explains.

QUESTION: Richard on Twitter asks how 0% financing deals work and how they make money. Dave explains.

ANSWER: To start with, they sell you the item at full retail. You’re paying full stinking price. Most of the car 0% deals are bait-and-switch because very few people actually end up leaving the lot with the 0%. Almost no one leaves the lot with 0% unless it’s at full manufacturer’s suggested retail price (MSRP). That’s where they make their money.

The second place they make their money is they sell the paper—the stream of payments. For instance, in an electronics store, 88%—that’s nine out of 10 people who buy a DVD player or a flatscreen without any money—still have no money 90 days later. Why is this shocking? At the end of paying the payments, they just sign up for payments.

The 90-days-same-as-cash or 0% until April or whatever it is converts to rip-off finance company paper at 27% interest or 38% interest. Some of it’s done with in-house financing. Some of it’s sold out to finance companies. If it’s done with in-house financing, they just make a ton of money off of you off the financing. Most people don’t pay the thing off during the 0% interest. Retailers make their money by converting it to expensive paper.

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