Not so simple right? Well what in life is?
Ahhh, the sounds of 4th quarter – every good (and not-so-good) sales rep is making that final year-end push – and if you watch any amount of TV at all, you’ll start to see commercials for cars, trucks, tractors, furniture, and even TVs being financed at 0% interest.
T.I.N.S.T.A.A.F.L. (There Is No Such Thing As A Free Lunch): which isn’t to mean you shouldn’t take it. Officially the way 0% financing works is there is a blind discount to the customer that the seller of the equipment either overcharges on the invoice or discounts to the finance company for an apparent rate of 0%.
In plain English: If I am selling a tractor, or a truck, or even a printing press for $60,000 and decide that to help move inventory, I am going to offer 0% to the customer; I need to first decide if I am going to raise the invoice price or take a hit on profit.
If I decide that I want to offer a 5 year term (60 months) at 0% interest than the customer thinks they are financing $60,000 for 60 months:
$1,000 * 60 months = $60,000
However behind closed doors the equipment seller is asking the finance company for only $55,000, while the finance company is collecting $60,000 worth of payments.
$60,000 – $55,000 = $5,000 (profit for the finance company)
In essence, free financing is not so free – someone is always paying for it. If the seller of the equipment is taking a hit on profit to offer free financing, then take it. The opposing side would be that the equipment seller is merely using free financing as a sales tool, and raising the invoice price of the equipment beyond what is considered fair market value.
Be cautious of free financing if what you are buying is less expensive elsewhere.