Q: So, I keep seeing commercials for furniture places where they're offering you a couch without payments for years and years... I'm pretty sure one of them lets you off until 2010, even. How are these guys making any money?

It's tough to get into specifics without seeing the exact commercial you're talking about (or even knowing what company you mean), but I can talk about some general cases.

It could very well be that the company is in trouble and they are trying to make their monthly payroll, but assuming that the furniture store in question is fairly large, my guess would be that they have entered into a private label financing arrangement with a specialty finance company. The gist is of private label financing is that a finance company collects and services debts under the name of the retailer. Usually "no-payments until...." programs include a clause to the effect that if the outstanding principal balance isn't repaid by the first payment date, the customer is liable for the retroactive interest from the date of purchase. Which could get pretty brutal if you're stringing it out to 2010. The interesting part, at least for me, is the economic balance that is struck between the two parties.

So, to start with, you've got the furniture store. They're primarily concerned with generating sales and moving inventory and a deferred payment plan is a great way to accomplish this. The problem is that most furniture stores are not in a financial position to defer their revenue for 24 months and don't have the staff to handle the servicing requirements on variable-rate debt. Enter the finance company. The economics work for them because they typically buy the receivables from the retailer at a discount (to compensate for the no interest period) and they can leverage their existing infrastructure to service the new debt at a low incremental cost. Both parties benefit under this type of scenario: the furniture store gets their money up front from the finance company and the finance company gets the discount yield plus the retroactive interest if the customer doesn't settle their full balance.

The private label relationship represents an efficient economic system; however, the efficiency can come at the expense of the customer. The combination of the purchase price plus however-many years worth of accrued interest, at a feelgood rate like 18%, can be a tough nut to crack. On top of that, many finance companies use their private label accounts as a lead source for their home equity business lines. Once a customer racks up a large enough balance, the finance company will offer to refinance them at a lower rate in exchange for a security interest in their home. This is the dirty little secret of the finance company; ultimately they want you to rack up a large enough unsecured balance that they can roll you into a long-term secured product.

In other words, the sweet financing on the couch is sort of like the proverbial first free hit of crack.