Interest free credit - How does it work?

Hazel_

I get the basics as a consumer - You borrow x amount and if you repay it before the date specified you won't pay interest.

But for a retailer how does it work? I'll use DFS as an example.

They give you 4 years interest free credit, So if the suite costs £1000 and the credit is supplied by Bank A, Do Bank A pay DFS £1000? If so how does the bank make money? Or do the bank give DFS £900 and charge £100 for finance? Just incase someone pays off before the interest gets applied?

Just something I've been pondering.

dresdendave

The finance house will make money by earning interest at a hefty APR from the many customers who fail to pay the full purchase amount by the due date.

HappyMJ

Hazel_ wrote: »

I get the basics as a consumer - You borrow x amount and if you repay it before the date specified you won't pay interest.

But for a retailer how does it work? I'll use DFS as an example.

They give you 4 years interest free credit, So if the suite costs £1000 and the credit is supplied by Bank A, Do Bank A pay DFS £1000? If so how does the bank make money? Or do the bank give DFS £900 and charge £100 for finance? Just incase someone pays off before the interest gets applied?

Just something I've been pondering.

With finance it's the other way around. Customer applies for £1,000 credit from retailer and retailer forwards that application to finance company. Finance company approves it and sends £1,000 to retailer and then sends another £100 a month later as a referral fee.

If the customer pays off the debt in full the finance company loses the bet...if the customer doesn't pay at all the finance company loses. The finance company wants the customer to keep the debt ongoing and pay interest in the future at a highly inflated figure of usually 35%APR then they win which they win more often than not.

Brains64

Hazel_ wrote: »

I get the basics as a consumer - You borrow x amount and if you repay it before the date specified you won't pay interest.

But for a retailer how does it work? I'll use DFS as an example.

They give you 4 years interest free credit, So if the suite costs £1000 and the credit is supplied by Bank A, Do Bank A pay DFS £1000? If so how does the bank make money? Or do the bank give DFS £900 and charge £100 for finance? Just incase someone pays off before the interest gets applied?



Just something I've been pondering.

Purely guessing with this one but I would imagine that the secret hope from their point of view is that a sizable number won't be able to pay it off before the interest gets applied and often that's exactly what happens.

I bought my sofa from DFS like that a few years ago, it only took me a year because it was much less than £1000 but even then I found it difficult at times to keep up the monthly repayments, just about managed but the point is that what seemed manageable at first started to become a challenge with all the other monthly payouts.

The last DD payment actually failed because of insufficient funds and the lender (Santander) wrote to me about it, it was only some £36 but from the letter you'd think I'd owed thousands, bailiffs, collection agencies, court was mentioned in the correspondence, paid it over the phone but it just goes to show how what seems like "gentle repayments" can turn into a huge mountain.

This is likely to be what both the loan company and the retailer are banking on, it's a fair bet on their part that anyone that needs to take a loan out to pay off as opposed to being able to come up with £500 -£1000 in one go is not all that well off, so it's a fair prediction that they will have trouble paying it all back within the interest free period, if they thought everyone would they would probably never offer that because as you say they wouldn't make a profit, this is how I think it works but as I say, just a guess.

Hazel_

So for the bank its more of a numbers game? If you pay before the end of the "free" period the bank looses? If not they win?

CLAPTON

Hazel_ wrote: »

So for the bank its more of a numbers game? If you pay before the end of the "free" period the bank looses? If not they win?

unlikely on a four year deal : probably true for short 6 month or even 1 year deals

probably subsidised by DFS as a cost of doing business

hillcats

Payments are divided equally between 48 months, so full debt will be repaid by the end of the term.

[Deleted User]

no such thing as "free credit"with dfs as they front load the price

CLAPTON

woodbine wrote: »

no such thing as "free credit"with dfs as they front load the price

the cost of a sofa is the same if you take free credit or you don't

all the costs (for all companies in all circumstances) are 'front loaded'; how can that not be so?

UsetheFORCE

Catalogues like Littlewoods as good as put the interest into their 'interest free' repayment option!

I could get the same items cheaper in other catalogues that would add interest as you go along, pretty much as standard!!!

....I certainly wouldn't rush to buy a sofa in DFS unless it was at least 60% off what they normally sell it for!!! The £2000 sofa would most probably sell elsewhere for a grand!!!

Hazel_

I used DFS as an example as I saw an Ad on the TV.

As for DFS. I don't remember a time when they have never had a sale.