There is No Such Thing as Interest Free

[Cotswold]

It is always irritating to see interest free adverts because they simply cannot be correct.

I cannot buy from companies or stores who offer interest free because they inflate their prices in order to offer interest free deals. I don’t want 3 years credit. If I want anything from a car to a computer, all I want to do is pay for in in full and walk away with it there and then. From those with interest free deals, I will ask for a 20% discount. An amount at which they are doing OK. If that isn’t given then I’ll walk out. Furthermore, the inflated prices of interest free have had the effect of lifting the prices in the rest of the market.

Over recent years an increasing number of companies are advertising products encouraging the buyer to pay the ticket price over three years and claiming the deal to be Interest free. The fact is that if a product is sold over three years interest free, by the end of the second year the seller will have debts that are equal to one years turnover. After that the debt level will not change unless turnover changes, or the scheme is closed.

As a simplified example. Say we look at a company with 2.5million turnover offering 3 years free credit. It will have an invoiced turnover of 7.5M after three years but will only have received 5M in payments. Presuming that turnover stays the same, then that 2.5M will always remain outstanding, until the interest free deal is ended. If turnover increases then the 2.5M debt will increase accordingly. Which is an unsustainable business model as clearly the 2.5M needs funding.

Looking at a 12 month interest free deal. If after 12months they have a turnover of 2.5M they will have only received 1.2M. It will be 23 months before an amount equal to the year one turnover has been received. There will be an annual running debt of 1.2M (in this example). Which is also an unsustainable business model. No company can afford to give two years credit on their invoices.

Both of the above scenarios ignore debts or unpaid charges over the period. Which will be difficult, if not impossible to avoid and will of course increase the amount outstanding and their costs. They also ignore the zero return on the permanent debit balance. That debit balance could easily lose half of its value in ten years without any return on capital.

As anyone who is, or has been in business will know it is unusual for anyone to happily allow above 30 days for their invoices. At 60, or 90 days they may well find themselves on-stop. They will where possible obtain payment prior to delivery and avoid bad debts. Being able to support a huge outlay without any return for years simply beggars belief.

What is happening is that the company sells their monthly invoices to a finance company. Presumably the company will promptly receive their monthly invoiced value less 20% or other agreed percentage from the finance company, or finance division if a large operation.

The rule is always : “if someone else is involved they don’t come free and need to be paid”

Clearly there cannot possibly be interest free so should not be advertised as such. Some even require a minimum purchase value, which is probably a diktat from the finance company. Clear indication of a finance company, or third party involvement.

The real problem with interest free is that not every customer will want, or accept the interest free offer but will want to pay for the goods in one payment on order, or on receipt of goods. In those cases they are being overcharged by the total of the finance fees and commissions.

Interest free deals are actually hidden interest deals.

 

[The_Doc_Man]

From Robert A Heinlein's The Moon is a Harsh Mistress, I remember the slogan "TANSTAAFL" - There ain't no such thing as a free lunch. You will find hidden charges everywhere. When someone claims "FREE" it usually means that the actual price isn't money out of your pocket but the money will come from elsewhere still at your expense. Like, for example, you sign up for an item - and they get another name to sell for advertising purposes. They get to tell their buyers what you bought - which gives them an idea of your level of purchasing power as well as your preferences in some way or another.

If the USA ever passed a "Right of Privacy" amendment, the "address list" sellers would howl like a scalded baby.

 

[GPGeorge]

It is always irritating to see interest free adverts because they simply cannot be correct.

I cannot buy from companies or stores who offer interest free because they inflate their prices in order to offer interest free deals. I don’t want 3 years credit. If I want anything from a car to a computer, all I want to do is pay for in in full and walk away with it there and then. From those with interest free deals, I will ask for a 20% discount. An amount at which they are doing OK. If that isn’t given then I’ll walk out. Furthermore, the inflated prices of interest free have had the effect of lifting the prices in the rest of the market.

Over recent years an increasing number of companies are advertising products encouraging the buyer to pay the ticket price over three years and claiming the deal to be Interest free. The fact is that if a product is sold over three years interest free, by the end of the second year the seller will have debts that are equal to one years turnover. After that the debt level will not change unless turnover changes, or the scheme is closed.

As a simplified example. Say we look at a company with 2.5million turnover offering 3 years free credit. It will have an invoiced turnover of 7.5M after three years but will only have received 5M in payments. Presuming that turnover stays the same, then that 2.5M will always remain outstanding, until the interest free deal is ended. If turnover increases then the 2.5M debt will increase accordingly. Which is an unsustainable business model as clearly the 2.5M needs funding.

Looking at a 12 month interest free deal. If after 12months they have a turnover of 2.5M they will have only received 1.2M. It will be 23 months before an amount equal to the year one turnover has been received. There will be an annual running debt of 1.2M (in this example). Which is also an unsustainable business model. No company can afford to give two years credit on their invoices.

Both of the above scenarios ignore debts or unpaid charges over the period. Which will be difficult, if not impossible to avoid and will of course increase the amount outstanding and their costs. They also ignore the zero return on the permanent debit balance. That debit balance could easily lose half of its value in ten years without any return on capital.

As anyone who is, or has been in business will know it is unusual for anyone to happily allow above 30 days for their invoices. At 60, or 90 days they may well find themselves on-stop. They will where possible obtain payment prior to delivery and avoid bad debts. Being able to support a huge outlay without any return for years simply beggars belief.

What is happening is that the company sells their monthly invoices to a finance company. Presumably the company will promptly receive their monthly invoiced value less 20% or other agreed percentage from the finance company, or finance division if a large operation.

The rule is always : “if someone else is involved they don’t come free and need to be paid”

Clearly there cannot possibly be interest free so should not be advertised as such. Some even require a minimum purchase value, which is probably a diktat from the finance company. Clear indication of a finance company, or third party involvement.

The real problem with interest free is that not every customer will want, or accept the interest free offer but will want to pay for the goods in one payment on order, or on receipt of goods. In those cases they are being overcharged by the total of the finance fees and commissions.

Interest free deals are actually hidden interest deals.

Fungible is a remarkable word. It applies here. "Money" is fungible. A dollar, or pound, or mark, or lira, or yen, or bolivar, or peso is the same regardless of whether it is extracted as interest, purchase price, commissions, tips, or service and handling fees.

It all ends up in the same pockets.

 

[NauticalGent]

It all ends up in the same pockets.

 

[Steve R.]

In a similar vein; there are the "never pay again" (implied free), warranty programs. In the small print they do acknowledge that there is a "small" subscription charge for the service, but the vast majority of the ad glowing portrays the service as freeing the consumer from any expense should the insured product fail.

 

[Pat Hartman]

I've pointed out many times here that "free" tends to mean that YOU are the product when it comes to software. Although, occasionally, startups will offer "lifetime" subscriptions for a short period because they need to raise capital. "During the next 6 months, if you pay for a 5 year subscription, it will be extended to 'lifetime'". It's a risk, but it isn't a scam. You are risking that the company will still be operational for at least 5 years and you will then have an actually free subscription. By the time the 5 paid years are up, the company should be on solid ground and is betting that it can therefore afford the "free" subscriptions that are still active.

 

[The_Doc_Man]

It all ends up in the same pockets.

With the codicil "not my pockets."

 

[Pat Hartman]

The stores that offer "no interest" for a year or more prey on the poor and the uneducated. Blame our education system for that. There should be a special place in hell reserved for the creeps who prey on the weak.

 

[Cotswold]

The stores that offer "no interest" for a year or more prey on the poor and the uneducated.

There aren't just the poor and uneducated.
There are the stupid who buy something from businesses with interest free deals and pay the ticket price. They are paying the 20% to 25% credit charges. Unless I can get a 25% discount I never buy from them. More need to demand the discount when not using the credit facility.

 

[ebs17]

But the reality is that produced goods have to be stored, and storage costs money.
To ensure that the warehouses and costs are not overrun in periods of low sales, people will be inclined to make concessions when selling, if the costs are lower than those for storage.

Reducing your own (production) capacity will also cost money, which hurts all the more if you are convinced that you have to get back to the same level within a reasonable period of time.

You can also dump grain into the sea to keep prices high despite overproduction, which has happened in the past. But someone has to pay for that too.

One of the big problems is that you are not working for a real need, but for continuous growth and more money through growth. But our earth is slowly becoming too small for this continuous growth.