There Is No Such Thing As Zero Interest
There is no such thing as zero interest. I will say it again... there is no such thing as zero interest. Let me explain.
Free money does not exist. Banks do not lend for free. When a dealership offers 0% financing, someone, somewhere is paying for it. Do you know who that someone is? You!
It works like this: a dealership has a cost on a piece of equipment, the invoice. This is what they paid for it, and they mark it up to make a profit. For example, a $10,000 tractor. The dealership wants a 15% profit so they mark up the price to $11,500 and that is what they call the cash price.
Here is where it gets interesting. If a dealership is going to offer 0% financing they need to add the cost of that financing to the price. You read that correct, they need to add the cost of the financing to the cash price. All manufacturers have relationships with banks so they can offer financing. So... that same dealership selling the tractor for $11,500 looks at his monthly sales brochure which tells him what the interest rate is. Take for example 5%. They calculate a $11,500 loan at 5% for 5 years. The total interest for that loan is $1521.15. Guess what the new price of the tractor is? $13,021.15! This is the price that they advertise. This is the price that will get you "zero interest."
You might be thinking, what the heck? They're taking me for a ride! They are. It gets worse.
Say you didn't need financing. You have some money burning a hole in your pocket and diesel in your veins. You ask that same dealership if there is any discount since you're paying cash. What is the cash price? They can do one of two things, tell you no, the price is the price or "sure, we can knock another $750 off since you're paying cash." You're thrilled. You got a deal. You got a 6% discount. In reality, you got robbed. The dealership took that $1521.15 it would have had to pay the bank to fund your loan, gave you a $750 discount and pocketed the rest.
Fair and honest pricing does not exist at any dealership which plays zero interest games. You, as the customer, never know what the real price is. You are at the mercy of that days manager.
One of the most common questions we get at United Truck Sales is "JD or K have zero interest financing, why don't you?" The answer is, we can, but we choose not to. All of our pricing is cash pricing. Simple and straightforward with no games. At the time I'm writing this blog post, our standard interest rate is 5.49%. Does that sound high? Probably, because people have been conditioned through massive advertising campaigns that low rate and zero interest is possible when in reality they are paying that same standard rate, possibly more, without even knowing it.
Do lower rates exist? Absolutely! Credit unions and banks are running specials all the time. Here's the catch: you have to go in to the bank, apply for the loan, provide documentation, wait for the underwriter to approve, wait for them to issue payment, pick up the check and bring it to me. The average turnaround time for in house financing through United Truck Sales and TYM's financing partner DLL? 10 minutes. After you fill out your application most people are approved in less than 10 minutes.
So next time you're out shopping, for anything, pay attention to all the retailers advertising zero percent financing. They are everywhere, from car and equipment dealerships to jewelry and electronics stores. They are all playing the same game!
I will say it one last time, there is no such thing as zero interest.