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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

#111

Post by kcanini »

kemiller2002 wrote: post #93
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…

Almost no one pays cash for a car anymore and the industry knows this. Many dealerships make more money (or at least they did, but I'm sure they still do) from getting people to get a loan from one of their "partners" (auto-loan companies which accept their paper). It's been years since I worked for an auto-finance company (my soul still feels a little dirty), but I know it wasn't uncommon for dealerships to get an a…

So the hispanic couple thought they were being given a free car?

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

#112

Post by ghufran_syed »

I feel like there is a natural tension between adults having the right to make their own decisions, and 'protecting' them from making bad decisions. Maybe what we need is a two-part market for financial services, a tightly regulated one where only regulator-approved, simple products can be sold, and one with much looser regulation, but that only those consumers willing to take a financial literacy exam are eligible for (with the financial firm being responsible for checking, and contracts being void if sold to unqualified buyers). After all, even brokers and traders have to take an exam before they are allowed to trade more complicated financial instruments (https://en.m.wikipedia.org/wiki/Series_7_exam). We also don't allow people to drive a car without proving they can do so reasonably safely.

The public could reasonably assume that the government might provide guarantees for products in the first group, in the way they do for bank accounts. Products in the second group would explicitly be excluded from any government guarantee - if you passed the exam, and want to risk your own money, totally up to you, but don't come expecting your fellow citizens to bail you out if things go terribly wrong later.

So for example, interest-only home mortgages are almost always a bad choice for most consumers, so they would probably be in the second group. So you could still get them if you really wanted one, but you would have to prove you knew what you were doing, and were willing to give up any hope of a government bailout.

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

#113

Post by kcanini »

MikeTaylor wrote: post #49

The two-step plan for effortlessly being better off than you otherwise would be (I won't say getting rich): 1. Buy the cheapest car you're OK with. 2. But the best house you can afford. This is simple. Cars (especially new cars) depreciate super-fast; and houses have appreciated at crazy rates at least for the last few decades. Don't put your money in a fancy car.

I thought house prices were relatively flat, on a long-term, inflation-adjusted basis.

https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index

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

#114

Post by bo1024 »

valuearb wrote: post #90
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 rem…

> The facilitators aren't fleecing them as much as just meeting their needs.

That's a misleading statement, unless you replace "needs" with "wants".

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

#115

Post by mynameishere »

ghufran_syed wrote: post #112

I feel like there is a natural tension between adults having the right to make their own decisions, and 'protecting' them from making bad decisions. Maybe what we need is a two-part market for financial services, a tightly regulated one where only regulator-approved, simple products can be sold, and one with much looser regulation, but that only those consumers willing to take a financial literacy exam are eligible f…

interest-only home mortgages are almost always a bad choice for most consumers

Just for future reference, if anyone lets you make an infinitely leveraged 500,000 dollar bet that you can walk away from at any time, you take that bet.

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

#116

Post by ZeroGravitas »

jacquesm wrote: post #55
pmuk wrote: post #30

Earlier quoted context omitted.

I agree. I helped my younger sister buy a car on a PCP recently, and I think they are actually a reasonable deal. It is my understanding that finance company guarantees the future value (GMFV) and that the final payment is optional, e.g. you can always hand the car back at the end of the term if it is worth less the the balloon payment.

That final payment combined with the trade-in value is structure such that the dealer is the only party that will give you a good price on the vehicle and you'll get a new car instead of buying out the old one.

This seems to be the crux of the issue.

I'd noticed that everyone seemed to be spending more on cars than I felt was wise. After discussing it with a friend with one of these deals he said he basically felt trapped into buying a new car after 3 years.

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

#117

Post by taeric »

tanderson92 wrote: post #107
taeric wrote: post #71

Earlier quoted context omitted.

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.

Do you have recommended reading or links to an overview of how it actually works?

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

#118

Post by raquo »

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.

The financing rate is 0% because the MSRP of the car is slightly inflated. If you pay with cash, you get a cash incentive (e.g. $2000 off), if you pay by financing, you get a similar discount but in the form of a lower nominal interest rate.

Jurisdictions with good legislation require dealers to also show the effective APR, which takes the cash discount into account and is almost always a more reasonable rate.

---

Apart from that there could be lots of special circumstances (making a quota, etc.) that could explain the discount if the offer was made to you personally as opposed to being advertised to the public.

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

#119

Post by eru »

taeric wrote: post #117
tanderson92 wrote: post #107

Earlier quoted context omitted.

You are incorrect and your magic analogy is flawed.

Do you have recommended reading or links to an overview of how it actually works?

A student subscription to the Economist perhaps?

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

#120

Post by eru »

no_wizard wrote: post #82
majormajor wrote: post #78

Earlier quoted context omitted.

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.

Why does buying a car in America involve so much (or even any!) negotiation at all? I guess it's a form of price discrimination?

I just tried to figure out (via Google) whether it's common in eg Germany---but what I found what mostly only about negotiations for used cars.

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