Marketing gimmick. You still pay interest, it is rolled into your final price. Hence the cash discount if you don't go the 0% route, they subtract the interest from the final price. Usually 0% financing allows people who cannot make a large down payment or pay cash for something to buy on credit. But sometimes the cash discount is so small that 0% makes better financial sense. When I bought our Kubota RTV-X I had the option of $300 cash discount or 0% for 48 months. The $15,000 I would have paid for the cash discount makes me $600/yr in interest, so I opted for the 0% financing and left my money in the bank. I don't mind using other people's money if it makes me money.
Yeah that “interest free” label is almost always a bit misleading, because like you said if cash is 3500 cheaper then that cost is clearly being recovered somewhere in the financing deal, usually hidden in the base price or incentives that only apply one way. Dealers know most people look at monthly payments and not the total, so they shift the numbers around to make it feel like a better deal than it actually is. That is why I always compare the full picture, kind of like when you read into offers such as
20 euro no deposit bonus casino where it sounds like free value at first, but when you dig deeper you see there are still conditions, requirements and limits that define what you actually get in the end. Same principle here, nothing is really free, it is just structured differently. In your case the cash option is clearly the smarter move.
