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Interest Free Loans

2,558 Views | 14 Replies | Last: 5 yr ago by investorAg83
BlackGoldAg2011
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AG
So a couple of weeks ago I bought a new mattress, and as we started talking pricing and terms the salesman said they offered interest free financing if you qualified. Went about my business, made my pick and sat down to sign on the dotted line. I asked about the terms around the 0% interest: no early pay off penalty, no up front cash discount, basically no strings I could find for the line of credit so I said hell yea i'll take 48 months interest free credit on this purchase I would have paid cash for otherwise. But then I couldn't help but ask him how they made any money on these financing deals. The store owner? chimed in at this point and said something to the effect of the bank that the financing is through offers the deal to incentivize customers to open new accounts with them.

my question to you all financial geniuses is, could this really be the entire explanation? people get these new lines of credit and then spend on them or start opening other services with the bank? I look at it and see free money to me which can't be, they have to be making money somewhere.
GtownRAB
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AG
Not sure the specifics on the opening accounts incentive, but furniture in general has huge profit margins. Combine that with most people can't pay cash and would finance almost anything they can anyway, they just add the financing costs into the price assuming most customers will take it.

You are right, typically they offer some cash incentive/discount that is typically equal or a little less than their cost of financing.
cgh1999
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AG
If they sell you a mattress for $1000, the finance company gives The furniture company $880. Assuming a 6 1/2% interest-rate over four years, that is almost $1000.

Seller has to decide how much profit he wants to give up to sell mattresses. Many people can't afford the price of the mattress, but if they can stretch the cost over four years it's more affordable. If you had to pay cash, they wouldn't sell as many even at a discounted rate.

If you screw up and miss a payment, they get penalty interest which makes him even more money.
The Collective
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AG
I have often wondered what % of people screw up on paying off 12 month 0% interest kind of deals.

Also, I would think an independent furniture store would give a cash discount if you haggle.
Dr. Horrible
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CJS4715 said:

I have often wondered what % of people screw up on paying off 12 month 0% interest kind of deals.

Also, I would think an independent furniture store would give a cash discount if you haggle.
I tried to haggle the last time I bought furniture and the guy basically said "nope, we want people to take the financing cause we make more money that way."
Aggie_2463
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AG
I hope I never have to finance furniture, just seems like at that point do you really need to be buying that furniture.....
NoahAg
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Funny, we were in the same spot last weekend. Salesman was talking about financing mattresses at 0% for 60 months!

I hadn't shopped mattresses in a long time but it was interesting how you really had to look to find the bottom line price. All the "sticker" prices on the front of the mattresses were in per-month dollars.

Like others said, I think people are just conditioned to think in monthly payments. And the salesman did a good job of this too (not in a sneaky, slimy way). But in relating how we pay monthly for phone and cable service for an indefinite amount of time and still not own anything, but eventually you'll pay off and keep your mattress.

In the end we did not finance anything.
aggiepaintrain
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AG
a person can usually get 10-15% off if they pay cash/check

OP you paid too much

FJB
gvine07
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AG
I don't know specifics, but I worked for a roofing company that offered "free financing" from Wells Fargo.

It cost us $550 for a 0% loan that had a limit ($25k-ish I think). A higher rate (6-8% a couple years ago) cost us $250.

I think the financing program stated we couldn't charge more if customers were using financing. We asked customers if they were interested in financing up front. If they said yes, we added $500 before giving them the price. If they said no, we didn't.

A lot of nice furniture is probably price-controlled. The retailers have to charge $X amount whether customers are using financing or not. It may cost them $100 or so, not significantly hurting their margins.


The roofing company never made money on the financing. I don't know about furniture stores...
Gary Johnson
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They're paying a % to the finance bank. I used to sell products like this and we were happy to offer a 5% cash discount(less than the bank fee).

Are you double-dog 100% sure you couldn't get a cash discount?
permabull
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AG
themissinglink
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AG
There is a huge margin in furniture. Ikea, online stores like Wayfair, and a general ability to research prices online have challenged margins at traditional brick-and-mortar furniture retailers. Lots more traditional furniture store have turned to the "bank disguised as a furniture/appliance store" business model.

Last time I bought furniture, we saw the sofa online for like $800 and went into the store. Online was advertising the cash price while the store had the same sofa marked up $400 with a "no interest financing for 3 years" sign on it. We had to mention the online price before they gave us the cash price.

Also, anytime a store advertising "we don't check credit" either get a cash discount or go somewhere else. If your credit is good, you would get a better rate than being lumped in with the rest of the population that lives from paycheck to paycheck.
HeightsAg
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In addition to serving as a catalyst/enabler to move high margin products, zero interest loans also come with many strings attached. The most common one is that if you don't pay off the loan in its entirety by the promotional period, you now have to pay all interest backdated to the first day of the loan at high rates plus penalties.

The brilliance here is that not only are stores able to get fiscally irresponsible people to buy things that they shouldn't have purchased in the first place, the targeted customers' track records would suggest that they will end up paying much more than had they not taken the "deal".
Dr. Doctor
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AG
When my wife (at the time GF) bought some furniture, I remember reading that exact bit in the fine print for Ashley Furniture.

So the $1000 worth of furniture would have 18 months of interest (12%) tacked on if you didn't pay it off at the end of the 18 months. So made sure that it was all paid at month 17.

~egon
Duncan Idaho
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CJS4715 said:

I have often wondered what % of people screw up on paying off 12 month 0% interest kind of deals.

Also, I would think an independent furniture store would give a cash discount if you haggle.

This is a big part of it. If you miss or are late with a single payment, including the last one, you are responsible for the entire amount of interest that you should have paid. And it is a pretty ****ty rate.

So the finance company gives the store's customers access to "no interest" loans knowing that only a few need to screw up on a single payment for them to have a bunch of loans getting charged sub-prime rates or even higher. But the kicker is, the portfolio if these loans are going to be a lot less risky than a pure sub-prime portfolio would be, since a fair number of them will be prime borrowers that just happened to screw up a single payment.

investorAg83
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AG
hypeiv said:

I would also be willing to bet people who finance tend to spend more money. So while you might be the one who spent the exact same financing it or not, for every one of you there are 9 people who say let me see how much they will approve me for then buy more stuff because of it.


Ding ding ding....this is where the furniture stores make money. A mattress purchase turns into an additional sofa and loveseat because hey, its free cash.
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