ELI5-How do banks make money when they offer 0% financing on vehicles?
In: Economics
Usually when a bank is offering 0% financing on anything — a car, a couch, a cell phone, etc. — the company selling the product is taking less profit to offer financing. They view it somewhat as a marketing expense, because it will likely draw people in for the sale.
So using a car for an example, you buy it for $30,000. They may have bought it for $23,000; paid the bank $3,000; incurred $2,000 of overhead costs (sales commissions, running the dealership, etc.); and kept $2,000 as profit.
It usually isn’t purely 0%. There’s some kind of catch.
It’s 0% for a brief period (after which the interest rate is *higher* than usual). Or it’s 0% with a huge down payment (allowing the bank to invest it immediately and make money off it). Or its 0% financing on only part of the loan (maybe it’s the first $10k, and the rest has a higher rate)
0% interest is still more than negative interest on other parts of the capital market. And possibly dealers pay a fee per sold car.
The Automaker has its own lending institution. It’s typically a choice of a rebate or special incentivized rate. They merely apply the rebate towards buying the rate down from prime.
They buy the car at 20k. They sell it to you at 30k. Even with 0% financing, they already made a 10k profit off the customer.
When it comes to car buying there are four areas where they will adjust things. The bank only needs to “win” in one of the four areas:
Price
Add-Ons
Trade in
Finance
If they are offering 0% interest then they are probably less likely to take much off of the sticker price, give you a good deal on your trade in or any free add-one.
It’s usually NOT actually 0. They’re allowed to call it zero even if it’s something like 0.6%
The auto manufacturer (Ford, GM, Toyota) will subsidize the interest, as long as the dealer can get a rate under 3% or a similar number. This is done when the manufacturer wants to get more inventory out, either because they overproduced or they are trying to expand their customer base.
Latest Answers