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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

#81

Post by no_wizard »

I don't think that this would be as large scale an issue in the United States at least if public transportation was as good as say, Japan's.

That would put a lot of pressure on the industry indirectly to be more transparent to the average consumer. I would think anyway. I don't have anything except anecdotal evidence and a gut feeling to back this up.

I think car ownership being needed outside the major 12 cities (Lookin' at you NYC!) that have good public transit is a national crime in and of itself.

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

#82

Post by no_wizard »

majormajor wrote: post #78
rootsudo wrote: post #40

Earlier quoted context omitted.

They make money in the markup of the car. A car MSRP or what it's sold far is far more then what it's cost to manufacture. Some dealerships like GM, used to also have a bank. GMAC. Ford w/ FMC. A car that's sold for 12-14K, has a general margin of 10-15%. Some as low as 5%, but still. The 0/1% is also hard to obtain, needing to have good credit and possibly sizable downpayment, but don't worry they have options if yo…

If you don't get your loan through the dealer, it's the same as buying in cash from their perspective. So in that case, I'll take my 2% external-bank-loan and drop off the check at the dealer all day long. Cuts your sticker-price negotiation ability a bit since they lose another place to fiddle with the numbers and make money on the backend, but ultimately the end result will be about the same, and it's much less hea…

I've always locked in the price and flat-out refused to talk about how I was paying for it until the price was agreed upon.

It worked for me, took more time I will say, but I got a good deal on a brand new car that I'll drive for a very, very long time.

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

#83

Post by amelius »

PuffinBlue wrote: post #19

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…

Did you compare with the cost of a similar loan from a bank?

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

#84

Post by ajross »

nvarsj wrote: post #31
nostromo wrote: post #25

Earlier quoted context omitted.

I used to buy cars with cash. But right now car loans are so cheap, if you have good credit, it may make more sense to take the loan and keep the cash invested. I think my current rate is 2% or so... an unthinkable rate not so many years ago.

When I bought a Honda many years ago, they were offering 1% financing. At the same time, Toyota was doing 0% financing. I don't know how they make a profit on it, but why wouldn't you get a 0% finance deal over paying in full? I think the main benefit of paying upfront is to buy a used car.

Those below-prime numbers are being subsidized by the price of the car. The calculus isn't any different for a car dealership than it is for a consumer: if it made more sense to invest that money than loan it out with a car for collateral, the dealership/bank would have done the same thing. They give you low rates because they want you to buy the car at the price they ask.

In principle, you can pull out a checkbook and bargain back the hit you know they're willing to take on financing.

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

#85

Post by bitexploder »

Spooky23 wrote: post #48
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…

My wife did that before we were married, except with cash. The GM asked where she stripped.

We get it, your wife is attractive. Seriously though, nothing makes a car salesman's heart drop more than when you negotiate hard, set a tough price, and then write a check for the while thing, when they were hoping you would finance to get some more upside.

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

#86

Post by valuearb »

benevol wrote: post #58
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…

It's feature, not a bug. Remember the sub-prime mortgage crisis? People were made to buy homes they couldn't actually afford. It's the American way of doing capitalism, and people should have gotten used to it by now.

You have it backwards. Buyers demanded the ability to buy homes they couldn't afford, the government required Fannie Mae, Freddie Mac and banks to finance them and the US Government guaranteed some of the loans.

The buyer behavior was rational, at least on the surface, because homes almost always appreciate over long periods and were appreciating like crazy during the bubble. We are pattern matching monkeys, all of us, and it's only the few who can see the bigger picture during those times.

Many didn't want to miss out on the big payday buying $300k homes and flipping them for $500k a few years later. All bubbles accelerate bad decisions/behavior and it's really difficult (if not impossible) to legislate incentive driven behavior away. It's obviously possible to not legislate bad market incentives, but we flunked that one to.

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

#88

Post by valuearb »

benevol wrote: post #63
pc86 wrote: post #59

Earlier quoted context omitted.

Nobody was made to buy a home they couldn't afford. They wanted it, and someone was willing to sell it to them at near-predatory rates. Nobody had a gun held to their head to sign a contract.

You're right. I rather meant to say "people were manipulated into buying...". It's always the same, people don't understand because they lack education and some rich guy will take advantage of that. The movie "The Big Short" [0] sums it all up very well. [0] http://www.imdb.com/title/tt1596363

No one was manipulated. Everyone was greedy. They read the news, they knew what the houses down the street sold for a few years before. They all thought they'd get rich flipping houses.

Loan officers just facilitated what their customers already wanted.

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

#89

Post by valuearb »

lithos wrote: post #75
benevol wrote: post #58

Earlier quoted context omitted.

It's feature, not a bug. Remember the sub-prime mortgage crisis? People were made to buy homes they couldn't actually afford. It's the American way of doing capitalism, and people should have gotten used to it by now.

Car loans are actually getting featured on Bloomberg for having similar risk last month. Though there were assurances that the same thing wouldn't happen since loan issuers were reining themselves in, that cars were far more liquid than a house, and easier to seize on a failed loan. Of course if it's already in the news, it's too late to act.

Car loans also aren't federally insured and guaranteed, and unlike the housing bubble, the federal government isn't pressuring car loan companies to make shaky loans to bad credit risk customers. This is almost entirely a free market, and so it's bubble will be smaller and the consequences will be visited almost exclusively to those who made the bad loans.

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

#90

Post by valuearb »

jacquesm wrote: post #17

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.

These products sell because people want them.

They want low payments.

They want to flip houses for massive gains in short periods.

The facilitators aren't fleecing them as much as just meeting their needs. Anyone who tells you that you can't afford that car or that home prices won't appreciate to the sky tomorrow isn't going to get your business.

And my school and my kids school teaches basic finance. No one ever remembers it because most kids aren't interested in it.

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