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EconomicsELI5 How do companies like Klarna and Afterpay make money without charging interest?(self.explainlikeimfive)
I see these companies offering installment payment options for online purchases but they don't charg...
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If everyone paid on time and didn't miss payments etc then they wouldn't make any money at all. But, people miss payments etc all the time, and that's when they get hit with huge fees and interest - that's when the likes of Klarna start to turn a profit. The more customers they have, the more chance they have of more people missing payments - more profit.
It's exactly the same as 0% interest credit cards - the 0% is usually only for a short time and the credit card company is hoping some people rack up lots on their credit card and then forget when the 0% runs out (or can't afford to pay it) then get hit with huge interest when the deal ends.
They also charge the merchant for accepting it - around 8%, so even if every single person paid on time they would still make a ton of money
The crazy thing about some 0% credit cards is if you miss a payment they start charging interest on the original balance. It’s like they record what the interest would be at 20-25% from the original balance and then just charge that. I made a big purchase that I could afford but the store offered one of these credit card payment plans which I took advantage of to defer payment and I was shocked to read that in the fine print. They also get you if you make fixed payments and then say you have $4 left but isn’t covered by the fixed payments, but you think you’re done with payments… that can count as a late payment
I think these type of 0 APR promo deals need to be, to some degree, illegal/regulated better. The giant catch that if you have ANY balance left you get charged the whole backdated amount of interest is almost NEVER communicated appropriately.
Glad I'mnreading this and learning this now.
Something similar almost happened to me. Bought something for around $1500 with Affirm for 0% interest. At the time I didn't have an installment loan on my credit so I figured "Eh, fuck it. Why not?" Zero percent is as close to free money as a normal guy can get.
Had autopay set up, and when the last payment was due it was somewhere around $40, as to where the previous payments were all $64. I guess this hiccuped the system enough where it didn't autopay.
Luckily, I caught it before anything bad happened but yeah. Could have been scary reading this now. That thing took forever to pay off 😂
that's a lot of bonds
Of course not...that wouldn't exactly be something you want to advertise in large font bold print...and they grease the palms and wheels of our Congress plenty well enough to keep any "reforms" out of sight.
I believe they all do this. Same with the buy now pay later service. The interest is from the original balance and you'll back to back pay.
Years ago I met someone who worked for GE Money bank and asked him how this worked because I had used them with 2 different merchants to get zero percent for 12 months and they didn't make any money off me. He said the vast majority of people who got zero percent for X months, didn't pay it off in time and wound up paying a lot of interest.
Yes, of course. I'm not surprised.
Credit Card companies make an absolute mint on the interchange fees, most credit card companies don’t touch the interest because the actual loans are held by third parties. Klarna made the mistake of holding onto the debt, and now they are losing shitloads of money.
Hell, Visa doesn’t actually deal with the interest and loans, they let that hassle go to a different party. They make ALL of their money on the interchange and none on the interest. AMEX is much the same, they used to not even allow you to run a balance, you had to pay it off every month. The interest is the scraps that the credit card company gives to whoever wants to deal with it (typically your bank).