0% Financing Becoming More Costly For Merchants

by Raymond Pucci 0

Are the days of 0% consumer financing over for shoppers at major retailers? Now that the Federal Reserve has begun to slowly increase interest rates, 0% financing deals for big ticket items will become more costly for retailers, as the following article relates.

The Federal Reserve is pushing interest rates higher. Don’t tell that to people who have become accustomed to buying everything at 0%. Years of rock-bottom interest rates have led to a proliferation of no-interest financing offers for people looking to buy everything from cars to lawn mowers, jewelry and furniture. Manufacturers and retailers have come to lean heavily on these deals, which are an inducement for shoppers considering large or discretionary purchases.

Now, with interest rates climbing, the cost of these arrangements will rise, pinching profits at companies that derive a large chunk of their sales from shoppers who prefer to pay in bite-size pieces. Most retailers will likely absorb the higher costs to stay competitive because customers may turn elsewhere if they are asked to pony up interest charges.

Although they acknowledge that rising interest rates will increase their costs, many retailers are hoping the Fed’s rate increase is a sign of an improving economy, which should help their sales grow. Consumers, meanwhile, can be very sensitive to changes in interest rates. Patrick Williams, senior director of marketing at Jacuzzi Group Worldwide, a Chino Hills, Calif., maker of hot tubs and other bath products, says his company has in the past experimented with 1.99% and 2.99% financing offers, with mixed results. “Consumers have become conditioned to seek out 0% financing,” he says.

There’s no free lunch supposedly, although consumers have become accustomed to just that with zero interest rate deals on big tickets items at their favorite retailers. Although market interest rates are still at very low levels, already sales-hungry merchants will be hard pressed to scrap the zero interest rate offers. Auto makers and their dealers find themselves in a similar quandary when giving rebates or low interest rate deals to car buyers. At some point, merchants can only absorb so much cost. But don’t expect zero interest rate deals to disappear—competitive forces and deal-savvy consumers won’t allow that for now.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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