Query: How does a bank make money on an interest free secured loan?

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 <=SEP=> "A ""true"" 0% loan is a losing proposition for the bank, that's true.  However when you look at actual ""0%"" loans they usually have some catches: There might also be late payment fees, prepayment penalties, and other clauses that make it a good deal on average to the bank.  Individual borrowers might be able to get away with ""free money"", but the bank does not look to make money on each loan, they look to make money on thousands of loans overall. For a retailer (including new car sellers). the actual financing costs will be baked into the sales price.  They will add, say, 10% to the sales price in exchange for an interest-free loan. They can also sell these loans to an investment bank or other entity, but they would be sold at a deep discount, so the difference will be made up in the sales price or other ""fees"". It's possible that they would just chalk it up to promotional discounts or customer acquisition costs, but it would not be a good practice on a large scale."

 <=SEP=> Most 0% interest loans have quite high interest rates that are deferred. If you are late on a payment you are hit with all the deferred interest. They're banking on a percentage of customers missing a payment.  Also, this is popular in furniture/car sales because it's a way to get people to buy who otherwise wouldn't, they made money on the item sale, so the loan doesn't have to earn them money (even though some will). Traditional banks/lenders do make money from interest and rely on that, they would have to rely on fees if interest were not permitted.

 <=SEP=> Generally speaking, an interest-free loan will be tied to a specific purchase, and the lender will be paid something by the vendor. The only other likely scenario is an introductory offer to try to win longer-term more profitable business, such as an initial interest-free period on a credit card. Banks couldn't make money if all their loans were interest-free, unless they were getting paid by the vendors of whatever was being purchased with the money that was lent.

 <=SEP=> The bank depends on the laws of large numbers.  They don't need to make money on every customer -- just on average. There are several ways that zero interest makes sense to them: You asked about banks, and I don't think you see this last scheme in use very much by a bank.  Here's why.   First, customers absolutely hate it - and when you drop the interest bomb, they will warn their friends away, blow you up on social media, call the TV news consumer protectors, and never, ever, ever do business with you again.  Which defeats your efforts in customer acquisition.  Second, it only works on that narrow range of people who default just a little bit, i.e. who have an auto-pay malfunction.  If someone really defaults, not only will they not pay the punishment interest, they won't pay the principal either!  This only makes sense for secured loans like furniture or cars, where you can repo that stuff - with unsecured loans, you don't really have any power to force them to pay, short of burning their credit.  You can sue them, but you can't get blood from a stone.

 <=SEP=> If interest rates are negative, a 0% load might still be profitable.

 <=SEP=> "Other answers didn't seem to cover it, but most ""0%"" bank loans (often offered to credit card holders in the form of balance transfer checks), aside from less-obvious fees like already-mentioned late fees, also charge an actual loan fee, typically 2-3% (or a minimum floor amount) - that was the deal with every single transfer 0% offer I ever saw from a bank. So, effectively, even if you pay off the loan perfectly, on time, and within 0% period, you STILL got a 3% loan and not 0% (assuming 0% period lasts 12 months which is often the case)."

 <=SEP=> Car dealers as well as boat dealers, RV dealers, maybe farm vehicle dealers and other asset types make deals with banks and finance companies to they can make loans to buyers. They may be paying the interest to the finance companies so they can offer a 0% loan to the retail customer for all or part of the loan term.  Neither the finance company nor the dealer wants to make such loans to people who are likely to default. Such customers will not be offered this kind of financing. But remember too that these loans are secured by the asset - the car - which is also insured. But the dealer or the finance company holds that asset as collateral that they can seize to repay the loan. So the finance company gets paid off and the dealer keeps the profit he made selling the car. So these loans are designed to ensure the dealer nor the finance company looses much. These are called asset finance loans because there is always an asset (the car) to use as collateral.

 <=SEP=> "In addition to all the points made in other answers, in some jurisdictions (including the UK where I live) the consumer credit laws require the lender to allow the borrower to pay off the loan at any time. If the lender charges interest and the borrower pays off the loan early then the lender loses the interest that would have been paid during the rest of the loan period. However if the actual interest is baked into the sale price of an item and the loan to pay for it is nominally ""0%"" then the borrower still pays all the interest even if they pay off the loan immediately. If you think this game is being played then you can ask for a ""cash discount"" (or similar wording: I once had problems with a car salesman who thought I meant a suitcase full of used £20s), meaning you want to avoid paying the interest as you are not taking a loan."

 <=SEP=> Very good answers as to how 0% loans are typically done.  In addition, many are either tied to a specific large item purchase, or credit cards with a no interest period.  On credit card transactions the bank is getting a fee from the retailer, who in turn is giving you a hidden charge to cover that fee.  In the case of a large purchase item like a car, the retailer is again quite likely paying a fee to cover what would be that interest, something they are willing to do to make the sale.  They will typically be less prone to deal as low a price in negotiation if you were not making that deal, or at times they may offer either a rebate or special low to zero finance rates, but you don't get both.