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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

#101

Post by skookumchuck »

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 0% loans often have costly penalties if you're late on a single payment. They're banking on the odds that you'll screw up and be late somewhere along the line.

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

#102

Post by obstinate »

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.

Amounts are too small, I would guess. https://fred.stlouisfed.org/series/MVLOAS Less then a tenth of the amount of outstanding home loans.

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

#103

Post by Retric »

takeda wrote: post #98
nvarsj wrote: post #31

Earlier quoted context omitted.

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.

I bought 0% Apr from Toyota. It's not really 0% though, because (at least in my case if I would pay cash, I would get $1,000 off). So this is equivalent of paying $1,000 of interest up front, just masked to look like there is no interest.

It's a little worse than that as you pay generally pay some form of sales tax on the purchase price not your interest payments.

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

#104

Post by ganoushoreilly »

tyfon wrote: post #91
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…

Same thing here in Norway. When I bought my last car, I negotiated the price down quite a bit and got upgrades/winter tires etc for the same price. When all was said and done and he asked how I wanted to finance it, I pulled out my direct debit and he went pale. I had to argue for another half an hour to keep all the negotiated stuff while paying for it outright, it was silly.

That's because their deal was hedging on the additional commission they'd gain from financing. It's rather screwy. Whenever I trade in a car I always negotiate price on the car alone first, then get a trade appraisal (usually have one in hand from Carmax prior) and if they start playing games I walk out. Past two cars, I walked out and got a call within an hour saying come back we'll do the deal.

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

#105

Post by eugeniub »

skookumchuck wrote: post #100
tyfon wrote: post #91

Earlier quoted context omitted.

Same thing here in Norway. When I bought my last car, I negotiated the price down quite a bit and got upgrades/winter tires etc for the same price. When all was said and done and he asked how I wanted to finance it, I pulled out my direct debit and he went pale. I had to argue for another half an hour to keep all the negotiated stuff while paying for it outright, it was silly.

I doubt it was silly. He likely offered you a deal that would have lost money if not for the financing.

That's exactly why it was silly.

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

#106

Post by forinti »

Which is why contracts should include warnings, as Senator Elizabeth Warren proposed.

Dangerous equipment should have warnings so that you don't lose your fingers and financial tools should have warnings so that you don't lose your shirt.

A decade ago I bought a Fiat (in Brazil) and was offered financing at 0,99% a month. This was worth it, as fixed income investments were paying more than 1% a month. Except that the administrative fees made the effective rate something like 1,99% (which was not worth it). The salesperson argued that I could pay the fees in installments too. It made me angry that they are allowed to do this to people who can't do the maths.

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

#107

Post by tanderson92 »

taeric wrote: post #71
tanderson92 wrote: post #68

Earlier quoted context omitted.

Again, yes that partially diversifies away credit risk. But you're still losing money if you compare to the risk free rate, which is the 5 year treasury on a 5 year loan. Let me just repeat that such a loan is being offered below the risk free rate! It's impossible for bundling to add yield, only decrease credit risk.

On that loan, yes. But just like nobody would buy magic cards if they knew all of them would be commons, adding just a few rare high value cards will pull the rate that people will pay for the others up. But only as a bundle.

You are incorrect and your magic analogy is flawed.

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

#108

Post by alexhutcheson »

thearn4 wrote: post #42
nvarsj wrote: post #31

Earlier quoted context omitted.

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.

Yep, my 2012 Civic was bought on 1% financing. Paid off now, still runs great, and I kept the would-be total payment in cash in retirement accounts. Probably could have done better on a used car, but for once I wanted to be the one to run something into the ground. Still waiting on that.

You'll be waiting a very long time on that one.

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

#109

Post by charlesdm »

fegu wrote: post #37
charlesdm wrote: post #29

Earlier quoted context omitted.

If cost of debt borrow money / finance

There is a lot more to this than a simple equation. Otherwise we would all borrow as much as we could (about 2% and somewhat predictable) and put it all in the stock market (avg 7,5 % but volatile).

Anyone willing to give me a loan for $10m at 2% -- I'm game.

2% is a good interest rate for a collateralized loan, and frankly, often it's not worth putting up the money yourself if you can borrow it (at 2%). Then again, a car isn't (really) an asset with a positive RoI..

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

#110

Post by losteric »

skookumchuck wrote: post #100
tyfon wrote: post #91

Earlier quoted context omitted.

Same thing here in Norway. When I bought my last car, I negotiated the price down quite a bit and got upgrades/winter tires etc for the same price. When all was said and done and he asked how I wanted to finance it, I pulled out my direct debit and he went pale. I had to argue for another half an hour to keep all the negotiated stuff while paying for it outright, it was silly.

I doubt it was silly. He likely offered you a deal that would have lost money if not for the financing.

Call me old fashion, but I think car salesmen ought to make their money off of selling cars instead of exploiting consumer's ignorance of financial tools and more complex math. This is so much more nefarious.
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