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Ask Dave

They Sound Like Monster Truck Rally Ads

J.C. asks how 0% financing works and how the retailer makes money. Dave explains.

QUESTION: J.C. on Twitter asks how 0% financing works and how the retailer makes money. Dave explains.

ANSWER: For instance, when you go into Best Buy—the electronics store—or Rooms There They Went—furniture store—they generally do not have a lot of profit margin in their products. If you’re buying a $1,000 item, they’re not making a ton of money on a $1,000 item where there is a cash transaction. They make the vast majority of their money in those settings on the credit—the borrowing of money—and on the extended warranties. I don’t buy extended warranties and I don’t borrow money, so I’m not a great customer for them. I buy stuff from them, but they don’t make much profit on me because I don’t buy extended warranties. They’re a rip-off. And I obviously never finance anything.

What about 0%? Eighty-eight percent, according to my buddy over at the finance company who buys this paper—he doesn’t buy Best Buy’s because they do their own in-house—when you finance a $3,000 purchase at one of these stores with nothing down and 0%, that paper—that contract—is then sold to or done with a finance company. Sometimes it’s an in-house finance company if it’s a big company like Best Buy, but they sell the paper. Either way, whether it’s in-house or whether it’s down at the local finance company, the averages are 88% of the time, you do not pay it off during the time. Nine out of 10 times, you don’t pay it off. Most people don’t pay it off.

If you don’t pay it off, let’s say you had 12-months-same-as-cash or 90-days-same-as-cash, the paper converts to payments with the finance company and the average rate is about 24% nationally. You pay a 24% interest rate and they back-charge you the interest through the entire time. If you don’t pay it off completely within the 90 days or in the one year or whatever your time frame is, you get charged interest back through that time and it’s added to your loan balance. As an example, a $3,000 at 24% is $720 worth of interest. If you don’t pay that off within 12 months if you had a 12-months-same-as-cash deal at 0%, then you’re not going to owe $3,000. You’re going to owe $3,720. Even if you paid it down, they’re going to add the whole $720 on the whole balance to the balance. Then you’re going to pay that off from that point forward at 24% or 38% or 26% or whatever it is, but it’s a rip-off high interest rate.

Most people don’t pay off the flatscreen or the couch or the dinette set. The vast majority of them convert to paper at high interest rates. They are making a pile of money on that and they’re making it on the people who are the most impulsive and the most immature. These are people buying crap they can’t afford. You don’t have the money. That’s the deal.

It is too good to be true. Then on top of that, the number of people who buy the extended warranty or the add-on plan or the gotchas or whatever when they pay cash is way lower than those who just add it to the bill when they’re borrowing money. These companies are really not in the electronics business. They’re really not in the furniture business. They just use the furniture to get the debt going because the debt is where they make their money.

Zero percent—they’ll give that one out of 10 people the “free money for the year” to get the other nine that don’t. You didn’t get a deal. You paid full retail. You weren’t even paying attention to what you paid for it because you weren’t asking how much. You were asking, “How much down and how much a month?” All you wanted to know is, “Can I get this TV home in time for the Super Bowl?” You’re acting like a freaking 4-year-old. And then you try to use your intellect and stick your nose up in the air as if you did something really smart getting 0%. All it says is you walked up into their bear trap, it snapped on your leg, and you’re too stupid to know it hurt. That’s what happens when you do 0%. Zero percent financing is so misleading.

Let me tell you about a couple who was in here the other day. They bought $5,000 worth of stuff over at Best Buy. Best Buy’s sales associates, if they do not get a certain number of financing contracts or credit cards or extended warranties done per shift, they get less hours and eventually, if they don’t meet their quotas, they get fired. They are under tremendous pressure to get you to take a credit card. They’re under tremendous pressure to get you to take extended warranties or to do one of these finance plans. The sales rep signed up the thing 90-days-same-as-cash. The guy says, “I don’t want the extended warranty.” So he didn’t think he got it because he said, “I don’t want it.” He didn’t look down at what he was signing. The guy wrote it in to put the extended warranty on because the guy wanted the sale on the extended warranty—fraudulently. The doofus client of ours signed the thing. He signed up for an extended warranty he didn’t know was on there, so when he paid off the balance, there wasn’t a balance paid off because he still owed the extended warranty amount. They back-charged him the interest through the whole year. He’s fighting them, but he’s going to lose because he signed the document. He says it’s fraud; Best Buy just says he signed it and bought it.

The best way to avoid all that is to just pay cash or don’t buy it. This is really not a hard thing. I’m not mad at Best Buy. I’m just using them as an example. They’re one of the biggest out there right now—nationwide brand that are doing this. Their predecessor, Circuit City, kind of got the whole thing started many years ago. It didn’t work out so well for them. Rooms There They Went, all these different companies, everything that you’re hearing about these 90-days-same-as-cash or one-year-same-as-cash—and it’s always done like it’s a monster truck rally—that’s what the ad sounds like. So who’s it appealing to? It’s appealing to the lowest common denominator, meaning they think you’re stupid. Why? Because you are if you fall for this stuff. I have fallen for it, and when I fell for it, I was stupid. I was 22 years old, and I bought a whole TV-stereo system—entertainment system—on 90-days-same-as-cash, and I’ve got a finance degree. I’m 51, so that was many moons ago. I’ve gotten over it. You’ve just got to look up and go, “Yes, it seems too good to be true because it is.” They make their money on the finance contracts and on the extended warranties. If you can’t afford a washer and dryer and write a check for it and own it, don’t buy it.

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