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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

#161

Post by tanderson92 »

taeric wrote: post #150
tanderson92 wrote: post #141

Earlier quoted context omitted.

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?

My explanation is that they've done the math on how more generous financing encourages more people to buy cars, and that the losses they take on the loans is less than the extra profit they make from the additional car sales.

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

#162

Post by to3m »

vonmoltke wrote: post #72
DanBC wrote: post #35

Earlier quoted context omitted.

From the article: > Graham Hill, of the National Association of Commercial Finance Brokers, told the FT recently that using a PCP, drivers could pay less for a new BMW or Mercedes than for a second-hand Ford Focus. Or, as Bob the Dinosaur might put it, “they just make you sign papers!” People don't tend to think of BMW or Mercedes as cheaper down markets cars.

Perhaps not in the UK, but in many parts of the US the leased (low-end) 3-series or C200 is the car if the so-called $30,000 millionaire (i.e., people living a lifestyle they can't actually afford by renting all the trappings).

The lower end BMWs are not fancy cars in the UK either. I don't know if they'd class as "cheaper" or "downmarket", but the typical example probably isn't exactly the opposite either. There are a lot of 3-/4-cylinder 1-4 series on the road, and the 520d is common too. Something similar applies to Mercedes and Audi as well.

(see, e.g., https://www.whatcar.com/news/the-10-most-popular-cars-in-the...)

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

#163

Post by maxsilver »

pc86 wrote: post #59
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.

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.

> Nobody was made to buy a home they couldn't afford. They wanted it

I suppose, in the same way that no one forces me to buy drinking water, I just want it, so as not to die.

If there is no affordable housing available (as is the case in most US markets today), you essentially are made to buy/rent an unaffordable home if at all possible. Because the alternative is homelessness, which isn't really an alternative.

Obviously, sometimes people purposely overspend on housing because of lifestyle inflation. But I don't think that's a majority -- many people are overspending on housing because housing is a fundamental human need and they have literally zero alternatives to overspending. It's more common than most people will admit.

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

#164

Post by eximius »

DanBC wrote: post #99
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…

Are you keeping an eye on your mileage? Some people don't, and get stuck with large bills when handing the car back.

Heh, this is going to be me next year if I don't start dialing it back a bunch soon.

Though I was single for part of it so it wasn't like I had a ton of options.

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

#165

Post by ncallaway »

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…

I would think a financial literacy exam would be too much.

I think a large red disclaimer page that says in very simple language: "This contract is unregulated and may be a dangerous financial transaction. Do not proceed unless you know what you are doing" that must be signed should be sufficient.

Simpler, tightly regulated contracts, wouldn't require this disclosure. If implemented well, it should be like the warning page you get when a certificate doesn't validate. Rare and scary is the best way to warn a consumer that something worth paying attention to is happening.

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

#167

Post by mxfh »

ajross wrote: post #84
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.

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 a…

This type of consumer credit's also seems to exist to lure enough people other to other products of the cooperating bank. It doesn't need to be priced in into the product and could actually be paid for by the bank as lead generation. Gullible people might fall for the types of "Keep your monthly payment rate and afford a vacation" while they are predatorily increase the actual interest rate.

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

#168

Post by coldtea »

skookumchuck wrote: post #131
losteric wrote: post #110

Earlier quoted context omitted.

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.

When I've bought mortgages, I was required by law to sign a document that says "I have read and understood these loan documents." I've seen many people in the newspaper complaining that they neither read nor understood the terms. At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?

>At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?

At no point. I don't even consider it a matter of "responsibility". You can only take responsibility when things are clearly laid out. But what about the even more important responsibility to CLEARLY lay things out that should fall into businesses?

What I do expect and find important, and should be legally binding, is that no business should be allowed to hide the actual impact of purchases behind legalese and long-winded "financial product" descriptions, and then put the blame on the customer for not "reading through it".

At the very least, they should be explicitly, and in common, everyday language, give something like: "The average buyer that used this financing option ended up paying X% above the base price".

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

#169

Post by lostlogin »

skookumchuck wrote: post #131
losteric wrote: post #110

Earlier quoted context omitted.

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.

When I've bought mortgages, I was required by law to sign a document that says "I have read and understood these loan documents." I've seen many people in the newspaper complaining that they neither read nor understood the terms. At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?

Do you read the terms and conditions pop up that every bit of software seems to contain?

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

#170

Post by nathanasmith »

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.

>Why does buying a car in America involve so much (or even any!) negotiation at all?

It's just another choice. There are plenty of car dealers here that offer a "no-haggle" experience if that's what you want.

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