Even if your bank or credit card is offering zero-percent financing, it isn’t free. Someone has to pay the interest on the borrowed money.
Lenders offer these incentives to attract more borrowers. Dealers and manufacturers also join hands to promote their products.
Let us discuss what is zero percent financing and how do companies make money with it.
What is Zero Percent 0% Financing?
Zero percent (0%) financing means a loan or credit facility with zero interest charges. It simply refers to any financing scheme that does not charge against lending money.
Usually, banks, mortgage companies, car dealers, credit card issuers, and other types of lenders charge interest for lending money. However, for special deals, these lenders may not charge interest.
Although a zero percent deal means zero interest charges, it can combine different packages that may incur interest charges after a specific period.
A common example of zero percent interest charges is from credit cards. Many credit card issuers charge 0% APR if the cardholder pays within the payback period. After that period, credit cards charge interest on the remaining balance.
Which Companies Offer Zero Percent 0% Financing the Most?
From banks to car dealers, and from credit card issuers to brokers, any company can offer zero-percent financing.
Most commonly car dealers, online brokers, and credit cards offer 0% APR on certain deals.
Zero percent financing is not uncommon in commercial banks either. However, banks do not offer 0% financing on all loan types.
Their common practice is to offer zero-percent financing on certain cars, homes, or credit card deals that attract investment for other products.
How Do Companies Make Money with Zero (0) Percent Financing?
Zero percent financing is liked by any borrower. No one wishes to pay high-interest costs to their lenders. But lenders do not lend for free, otherwise, what’s the incentive for them?
Although it sounds irrational but lending companies do offer certain deals with 0% interest rates. The offer can be a straightforward one or a combined package with other loan types.
Let us discuss a few key reasons for companies offering 0% financing.
They Get Interest Rate Discounts from Banks/Manufacturers
You will often see a zero percent offer from car dealers and banks that lasts for a few days. But the offer will be back soon for another vehicle soon.
The truth is car manufacturers and dealers offer these loans for certain vehicle models. Either these models cover their total cost of production plus offer good profit margins or they don’t sell at all.
Either way, the manufacturers will be interested in offering cheap loans to attract buyers. The interest cost would be shared by the manufacturer and the dealer, and the bank or the lending company will get its full share.
The same goes for other products and not just cars. For instance, large retailers may offer the same 0% financing for some products as well.
It means retailers would get their share from the manufacturer who in turn would make enough money from product profit margins.
The Pricing Difference
As mentioned above, lenders would offer zero percent loans on certain products. Even retailers would carefully select products for these loan schemes.
The lenders and the product sellers join hands to attract buyers. They aim to sell more by not charging any interest.
The catch is in the selling price of the product. As the product pricing remains uniform across the region, buyers do not feel the difference in the pricing easily.
Using It as a Marketing Tool
The lending industry is congested with competitors. There are hundreds and thousands of lending products in the market.
For example, take the credit card industry. Credit card issuers, banks, retailers, dealers, and private lenders all offer lending products and financing facilities.
All it means is that it’s getting harder for lenders to attract borrowers with increased competition.
A zero percent financing can serve as a good marketing tool for these lenders. The ultimate goal is to attract borrowers for other interest-bearing loans.
Zero Percent 0% Financing – Used as a Sweetener
A common theme in 0% financing is to use it as a sweetener for other lending products.
For instance, credit cards offer a 0% APR or an interest-free period to their users. Does it mean they do not charge interest at all? No.
Credit card issuers know well that consumers will spend more and wouldn’t be able to repay all borrowed money within the interest-free period. They’d charge staggering interest rates thereafter.
The same goes for car dealers, online brokers, and private lenders as well. They aim to offer this scheme as a sweetener so that they can earn interest on other products.
* Followed by “Terms and Conditions” Apply
And last but not least reason for companies to offer 0% financing is to look at the asterisk * mark with the bold zero on the advertisement.
Many lending firms wouldn’t offer a zero percent loan without certain terms and conditions.
The foremost term here can be the credit score requirement. Lenders want to lend money with high credit scores.
Then, they may not offer 0% financing on all products. Car dealers offering 0% APR for certain car models is a good example of that.
Also, like credit card companies, zero percent financing offers are often available for limited periods.
Is Zero Percent Financing Always the Cheapest Option?
From the outset, nothing can beat a 0% financing loan. You can take a loan and repay in years without incurring an additional penny.
In practice, that is rarely the case. Zero percent financing is often offered for shorter periods. It means if you get similar financing (suppose for a car), you’ll get an extended loan term.
It means you’ll be paying higher installments due to the shorter period. You may also lose any cashback or rebate rewards from the lender with interest-bearing products.
In short, it is a good idea to opt for a 0% loan when you can afford loan. However, there is no guarantee that it will always be the cheapest option.
The Do’s and Don’ts of Zero Percent 0% Financing for Consumers
First of all, consider your financials before you take a loan even if it offers 0%.
For instance, if you want to take advantage of a 0% APR credit card, never delay your borrowed money. If you’re late, you’ll incur high-interest costs.
Contrarily, if your finances are in a good position and you can afford to pay the loan installment over the loan period, you should always go for it.
As a precaution, do the maths and calculate your monthly installments over the financing term to avoid any losses later.
Zero Percent Financing Vs. Zero Percent Trade Commissions
Zero percent financing is offered by banks, credit cards, and lenders. It is a common loan scheme to attract more borrowers.
Similarly, zero percent trade commissions are commonly offered by online brokers.
Online brokers embed their commissions into trade spreads. They do not need to charge trade commissions separately.
It means although brokers are charging you a commission, they do not reveal it.