Many traders offer their customers 0% financing
Most consumers have limited financial resources and have to save a long time to make a larger purchase, such as a new television or a car. This displeases the dealers. For this reason, retailers are considering various strategies for how they can increase consumer consumption. One of these strategies is the free provision of a loan in the form of so-called 0% financing.
0% financing – pay installments instead of saving
The 0% financing is based on the principle of paying installments instead of saving. The easiest way to explain this principle is to use an example. For example, suppose a consumer who could save $ 50 a month is in a store and is interested in a new television that is priced at $ 1,200. Unless he takes out a loan, this consumer would have to save 24 months to afford this television.
However, many consumers do not want to wait that long and are therefore interested in financing at the lowest possible interest rate. For this reason, numerous retail, online and mail order companies that want to increase their sales offer their customers so-called 0% financing.
If the dealer should offer his customers 0% financing in the example shown here, this means in concrete cases that the consumer can pay off the TV in 24 installments of 50 USD each.
In many cases, 0% financing is just a supposedly good deal
At first glance, 0% financing is a free loan. At second glance, however, you have to recognize in most cases that 0% financing is very expensive. The reason for this is the fact that 0% financing usually leads to a higher sales price. For example, it is conceivable that another retailer is offering the same television at a cash price of 1,000 USD. In such a case, the difference between the two sales prices of $ 200 can be viewed as interest for the financing.
The amount of the monthly installment should be the basis for decision-making for financing
As you can see from the example given, when financing a purchase, you should not only pay attention to the interest rate offered, but also to the sales price. A low sales price often leads to a decrease in the amount of the monthly charge, even with a higher interest rate. This can be explained very well using the previous example. Suppose a consumer does not buy the television from the first retailer, but from the second retailer, and finances it at an interest rate of 5 percent over 24 months. In this case, the consumer pays a monthly installment of 43.87 USD. It saves around 150 USD over the entire term.