What's in it for a company offering a 0% interest loan?

GangBusters

I'm considering buying something and the company offers a 0% interest loan (unsecured) which is financed by a third party loan company (secure trust bank plc). So the company gets paid in full by the loan company takes the risk of me paying them back, except they don't even get any interest from taking that risk. 

So what's in it for the loan company? 

bradders1983

The loan company will take their cut from the retailer. The retailer benefits still as its a sale they probably wouldnt have got in the first place if 0% credit wasnt being offered.

Silvertabby

In other words, the 0% interest offer is factored into the price.  When we bought our new windows, from a company that we had dealt with before, the salesman said of course we could have 0% interest.  Or 5% discount.  We went for the discount. 

New_World_Man

If the loan is not paid in time then it’s reverts to a high rate of interest. They usually offer the chance to extend the repayment period, also at a higher rate. If you are tight for cash it can be tempting to take up the extension offer. I think they have worked out that enough people will defer/extend payments to make it profitable. I had a 0% deal on a new cooker. Paid it back in full before the 12 month offer period expired but I was regularly given offers to make small repayments over an lengthy period instead.

eddddy

As a simplified example.... 

• The retailer could sell you the item for £100 with no interest free credit
• But instead they choose to sell it to you for £150 with interest free credit
• The finance company pay the retailer £110
• You pay the finance company £150 in instalments.

So the retailer is better off, the finance company is better off - but you are worse off.

('Interest free' credit is never free.)

mwarby

New_World_Man said:

If the loan is not paid in time then it’s reverts to a high rate of interest. They usually offer the chance to extend the repayment period, also at a higher rate. If you are tight for cash it can be tempting to take up the extension offer. I think they have worked out that enough people will defer/extend payments to make it profitable. I had a 0% deal on a new cooker. Paid it back in full before the 12 month offer period expired but I was regularly given offers to make small repayments over an lengthy period instead.

also it always used to be that they wouldn't tell you at the 12 month point, if you did nothing it would turn into a loan at about 30% and interest would be backdated

[Deleted User]

Think DFS ..

Confusedezza

eddddy said:

('Interest free' credit is never free.)

Generally true, but there are rare exceptions.
For example, I have a 0% credit card (with Virgin) and have never paid a single penny in interest, and can use the card virtually anywhere, not just on goods with a 'loaded' price. When I took it out I was given 28 months on purchases, so will make sure everything is paid off before that date arrives.

Confusedezza

Silvertabby said:

In other words, the 0% interest offer is factored into the price.  When we bought our new windows, from a company that we had dealt with before, the salesman said of course we could have 0% interest.  Or 5% discount.  We went for the discount. 

You definitely could have negotiated more than 5% in that instance.

eddddy

Confusedezza said:

eddddy said:

('Interest free' credit is never free.)

Generally true, but there are rare exceptions.
For example, I have a 0% credit card (with Virgin) and have never paid a single penny in interest, and can use the card virtually anywhere, not just on goods with a 'loaded' price. When I took it out I was given 28 months on purchases, so will make sure everything is paid off before that date arrives.

Kind of - but Virgin aren't a charity. Giving people 28 months of interest free credit must be making them a profit overall, or they wouldn't do it.

I guess a small chunk of that profit comes from merchant fees. And those merchant fees push up the price of the things you buy. (Or put another way, if the retailers didn't have to pay merchant fees on CC transactions, they could afford to reduce their prices a little.) So you're paying for the credit there - although you're probably being subsidised by debit card payers, and maybe by cash payers as well. (Although handling cash is sometimes more expensive than taking CC payments.)

I guess that a much bigger chunk of that profit comes when people don't manage to pay off their balances after 28 months - but hopefully, you won't be one of them.

bris

people see interest free and think it's a good deal. it isn't, the cost of the product id way over inflated.

In the old days when the likes of DFS etc were offering free credit you could get a cash discount on the goods.
This was then deemed unfair to those that needed the credit, so the law changed and you could no longer get discounts for cash.

End result is that anyone paying cash now are also helping to pay for the interest free credit with bigger margins for the retailers.