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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

#141

Post by tanderson92 »

taeric wrote: post #130
eru wrote: post #119

Earlier quoted context omitted.

A student subscription to the Economist perhaps?

That my analogy is flawed is not exactly surprising or helpful. It is an analogy and only intended directionally. At best. You two seem to indicate it isn't good at even that. Which is a claim I'm interested in knowing more about.

I explained it above. The dual risks in a loan are credit risk and term risk (look those up and learn about them). Since the term is 5 years, the investment with no credit risk is the 5 year treasury (this is the credit risk-free rate). All loans have credit risk. Bundling loans does not eliminate credit risk (this is what 2008 taught us), though it does reduce credit risk. Selling loans with rates below the risk-free rate has negative expected return.

The proper analogy is this: treasuries vs. corporate bonds. Here is the current yield spread (difference in interest rate: corporate minus treasury): https://fred.stlouisfed.org/series/BAMLC0A0CM

The spread is always positive, because investors demand extra yield for taking on credit risk.

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

#142

Post by johnminter »

valuearb wrote: post #88
benevol wrote: post #63

Earlier quoted context omitted.

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.

You have missed an important point. Those loan officers were paid a fee for the service and their institution sold off the loans that were derivatized. The patsy was down the line. They all got paid...

Go back and review the news that came out. "The Big Short" is a decent summary. The trading manager at Bear Stearns who bought the derivatives got to walk out and keep his big bonuses. The share holders ate it. The rating institutions were complicit too - they knew the products were crap but knew the customers (lending institutions) would go to another one and so wrote the bogus ratings. See the players in the game got paid. The snooks got screwed.

Bill Black, who prosecuted the Savings and Loan Crisis, and sent many fraudsters to jail reviewed the 2008 crash and was incensed at the lack of prosecution.

The consumers saw what they wanted to see. Very few consumers perfomed due diligence. The old proverb tends to be true: "If something seens to be too good to be true... It probably is." Fraudsters have taken advantage of the gullible throughout human history. Our generation has no excuse: we have unparalleled access to information and most are too lazy to put the effort in to check these things out our to hire competent counsel who work for us not the seller. How many parents and students understand the debt they take on for college and the expected ROI???

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

#143

Post by tnecniv »

forinti wrote: post #106

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…

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

How would this work? Isn't the contract itself supposed to be the warning? Obviously contracts can contain a lot of legalese and potentially unenforceable language that makes them difficult for most people to interpret, but that language is also necessary to specify the contract at the level of detail the law requires. If you require a warning for the contract, how do you ensure that the warning is sufficiently authentic?

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

#144

Post by andrewflnr »

The bit about banning complex contracts is funny, especially contrasted with the alternative of having machine readable versions. My guess is that a machine readable format sufficient to express all the complexities of these contracts, especially conditional payments, is going to be Turing-complete, or pretty close to it. Anyway, it's going to be really hard to do that third-party comparison. The obvious solution is to only allow contracts that can be analyzed in some tractable logical framework... but limiting complexity is where we started.

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

#145

Post by brianwawok »

eru wrote: post #120
no_wizard wrote: post #82

Earlier quoted context omitted.

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.

Literally, the only things you negotiate in the US are cars and houses. Not groceries nor clothes nor millions of other things. Perhaps a few minor things here or there.. but we pretty much just stick to the basics.

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

#146

Post by Trundle »

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

I'm surprised that you say that while referencing The Big Short because I thought it made it pretty clear that the people selling houses lacked education as well. There was the whole thing where the guy sees dudebros selling houses to strippers and was all "oh no its all true". I think one of the dudebros even said something like "I was working at the car wash two years ago and now I have a boat". Everyone else not knowing what was going on was the uniting theme of the main characters.

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

#147

Post by brianwawok »

shados wrote: post #26
endianswap wrote: post #20

Earlier quoted context omitted.

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.

That heavily depends on where you go and the area. Not the same as a car, but when I went to get the check for the down payment on my home (which was 6 figures), I went to my bank which happened to be in a pretty upscale neighborhood were houses were significantly more expensive on average than what I was buying. So when I asked the teller to give me a multi-hundred-thousand dollar check, they didn't even blink. "Ple…

It's weird getting big checks if you aren't used to it. I had some money coming out from a home sale and got a cashier's check for 50k or something. They asked for ID and checked it very slowly, but nothing past that.

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

#148

Post by agentdrtran »

losteric wrote: post #110
skookumchuck wrote: post #100

Earlier quoted context omitted.

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.

car dealers are like the most common example of this since forever...

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

#149

Post by brianwawok »

ZeroGravitas wrote: post #116
jacquesm wrote: post #55

Earlier quoted context omitted.

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.

Yes. The deal is dandy if you plan to buy every 3 anyway. If you don't, that is the big downside. (Or if you want to drive a lot of miles, etc). Buying a car every 10 years is a lot more fun than every 3..

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

#150

Post by taeric »

tanderson92 wrote: post #141
taeric wrote: post #130

Earlier quoted context omitted.

That my analogy is flawed is not exactly surprising or helpful. It is an analogy and only intended directionally. At best. You two seem to indicate it isn't good at even that. Which is a claim I'm interested in knowing more about.

I explained it above. The dual risks in a loan are credit risk and term risk (look those up and learn about them). Since the term is 5 years, the investment with no credit risk is the 5 year treasury (this is the credit risk-free rate). All loans have credit risk. Bundling loans does not eliminate credit risk (this is what 2008 taught us), though it does reduce credit risk. Selling loans with rates below the risk-fre…

I asked you the wrong question, then.

What, then, is your explanation for why they make these loans?

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