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Too many people are buying cars using financial products they do not understand

timharford.com

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Re: Too many people are buying cars using financial products they do not understand

#11

Post by djmobley »

maxerickson wrote: post #8
jordanb wrote: post #5

So I guess the whole car thing is probably going to be this cycle's mortgage bubble? Considering car sales are falling off a cliff I guess we're in 2007 right now.

No one buys a car expecting the value to go up so the vehicle market probably won't unravel in a collapse (vehicle debt is also about 1/10 the size of the mortgage market).

At the high-end of the market, lots of people do, in fact, buy cars expecting them to appreciate in value.

Manufacturers are increasingly offering limited edition cars to cater to this kind of investment.

Re: Too many people are buying cars using financial products they do not understand

#12

Post by selectodude »

djmobley wrote: post #11
maxerickson wrote: post #8

Earlier quoted context omitted.

No one buys a car expecting the value to go up so the vehicle market probably won't unravel in a collapse (vehicle debt is also about 1/10 the size of the mortgage market).

At the high-end of the market, lots of people do, in fact, buy cars expecting them to appreciate in value. Manufacturers are increasingly offering limited edition cars to cater to this kind of investment.

Yeah, nobody is financing Porsche 918s.

Re: Too many people are buying cars using financial products they do not understand

#14

Post by Shivetya »

While car contracts can be unnecessarily confusing they are not the only opportunity for reform. Service contracts need simplification as well, whether your agreement for internet or cell service, to merely using one of the online streaming services. There is a lot of boiler plate in there that could be minimized with some good changes to the law.

This story is UK based, is there no Truth In Lending type act to help simplify these contracts into terms people can readily understand? A recent car purchase I made in Georgia (US) was very easy to understand, all the numbers on one sheet.

Re: Too many people are buying cars using financial products they do not understand

#15

Post by evilDagmar »

I was under the impression that the whole point of auto-financing was to get even even more money out of the consumer. When I bought my last car, I just bought it outright (because it wasn't particularly expensive) which appeared to baffle the dealership. I was actually a little concerned that the dealership told me it was the largest check they'd ever seen (for ~$14k).

Getting people to sign off on a contract they don't really understand is a great way to get more money out of the consumer than they'd otherwise spend.

Re: Too many people are buying cars using financial products they do not understand

#16

Post by cynicalbastard »

selectodude wrote: post #12
djmobley wrote: post #11

Earlier quoted context omitted.

At the high-end of the market, lots of people do, in fact, buy cars expecting them to appreciate in value. Manufacturers are increasingly offering limited edition cars to cater to this kind of investment.

Yeah, nobody is financing Porsche 918s.

yes they are. rich people get loans to buy expensive things instead of giving up the cash, often collateralized by their other toys/stock/trust fund/whatever. rich people also overspend, over-leverage, and overindulge just like everyone else.

the difference is they call up their banker and accountant instead of filling out a form at the dealership.

if you're expecting an asset like a 918 or 911RS or R to go up in price, you'd be stupid to not leverage your cash at a low interest rate and put the rest of it to work somewhere else. at this point it becomes a business move, not a trip to the mall. it's like financing a construction project.

do you think they buy jets and yachts and big homes in cash also? of course not. they setup holding companies and finance the purchases, and then charter or rent the asset out to make some of the money back and to pay the crew of people that run these types of properties. that's why you can rent an amazing vacation home for $1k a night, or spend a few days on that yacht with a bunch of friends for $5k, or rent a ferrari for a few hundred bucks.

rich people are exceptionally good at monetizing and leveraging facets of their life that look like giant expenditures to you or i. poor people try to emulate this behavior, and meet their financial ruin, because they aren't savvy or rich enough to make it work.

Re: Too many people are buying cars using financial products they do not understand

#17

Post by jacquesm »

This goes for many things outside of cars. Insurances, Mortgates, student debt, lottery tickets, consumer debt, credit cards and so on.

In general people are sitting ducks when it comes to being fleeced by parties with a plan.

I always wonder why schools don't even teach the beginnings of finance to everybody. You'd almost think there is a reason why it explicitly is not being taught.

Re: Too many people are buying cars using financial products they do not understand

#18

Post by selectodude »

cynicalbastard wrote: post #16
selectodude wrote: post #12

Earlier quoted context omitted.

Yeah, nobody is financing Porsche 918s.

yes they are. rich people get loans to buy expensive things instead of giving up the cash, often collateralized by their other toys/stock/trust fund/whatever. rich people also overspend, over-leverage, and overindulge just like everyone else. the difference is they call up their banker and accountant instead of filling out a form at the dealership. if you're expecting an asset like a 918 or 911RS or R to go up in pri…

I'm plenty of aware of how people with assets are able to use them as collateral to borrow money, but this article has nothing to do with that kind of financing. It's about 72mo high interest loans on cheaper downmarket cars marketed to people who used to buy old junkers.

Re: Too many people are buying cars using financial products they do not understand

#19

Post by PuffinBlue »

Maybe I didn't understand the deal I bought a car with, or maybe it's an unusual deal, but I'm happy with it.

My car costs me a set amount per month that I can afford, an amount that is actually equal to the monthly depreciation it would face anyway (on average) over a three year period (including the initial low value deposit I paid, this is still true).

Even if I bought it outright, which I couldn't afford to do, I'd 'lose' the same amount of money _in total_ thanks to that depreciation. Effectively I'm 'renting' the car for the same 'cost' as owning it, just without the upfront payment.

Further, GAP insurance purchased at a one off price of about £100 (which was far more tricky to make sure I got the correct thing) will cover any difference in the 'hand back' price at the end of my term and the value of the final payment. So basically if the car does depreciate below the value of the final payment then the GAP insurance will make up the difference. Likewise if I have an accident etc.

I reject the idea that PCP deals are like 'buying and selling a series of homes using interest-only mortgages'. Cars lose value, always. Whether you buy it outright or not, it'll depreciate in value (save for some hyper rare beasts you aren't going to be buying on PCP anyway). But the article doesn't address this point at all as far as I can see and it's an important part of the value proposition of using these types of deal.

Re: Too many people are buying cars using financial products they do not understand

#20

Post by endianswap »

evilDagmar wrote: post #15

I was under the impression that the whole point of auto-financing was to get even even more money out of the consumer. When I bought my last car, I just bought it outright (because it wasn't particularly expensive) which appeared to baffle the dealership. I was actually a little concerned that the dealership told me it was the largest check they'd ever seen (for ~$14k). Getting people to sign off on a contract they d…

That seems insane that it'd be the biggest check they've seen. I've bought an 80k BMW and an 80k Jaguar outright, and they both shrugged at me paying by check. BMW let me use a personal check, Jaguar wanted a bank check (easy enough).

Edit: A normal down payment for a luxury car of any brand can easily be 20k up front.

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