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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

#201

Post by desas »

Shivetya wrote: post #14

While car contracts can be unnecessarily confusing they are not the only opportunity for reform. Service contracts need simplification as well, whether your agreement for internet or cell service, to merely using one of the online streaming services. There is a lot of boiler plate in there that could be minimized with some good changes to the law. This story is UK based, is there no Truth In Lending type act to help…

Usually taking out finance and making some investment decisions requires that you are given a Key Facts Illustration, which looks roughly equivalent.

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

#202

Post by aiyodev »

I can't believe the car bubble isn't a bigger story. I know a waitress who is single, can barely afford an apartment, can't afford internet service, and who just financed a brand new Jeep. This reckless lending is setting the country up for catastrophe. The next economic downturn will cause people to lose their homes and their cars.

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

#203

Post by jfoutz »

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?

When they pass the bar exam. It's easy to think you understand a contract, but you don't.

Unfortunately clear language isn't litigated. The vague and obtuse language has a legal meaning, because it has gone to court. So that's what contracts are forced to use.

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

#204

Post by lucaspiller »

shimon_e wrote: post #198
cperciva wrote: post #188

I'm not familiar with this particular structure, but it sounds like the sequence of cash flows are: 1. Customer receives car. 2. Customer pays monthly amount based on the prevailing interest rate and predicted depreciation of the car. 3. Customer returns car after X years, at which time the depreciated value of the car along with the payments they've made pays for the car they received X years earlier. Can someone ex…

Tax deductions and other such shenanigans.

In the U.K. this isn't really possible with car leases. If your company owns the lease, then you need to pay taxes for any personal use (personal 'benefit-in-kind' taxes, and the business can't reclaim VAT). If you personally own the lease, the only thing you can claim is mileage for business use - but this is the same as owning a vehicle outright.

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

#205

Post by raquo »

thenewwazoo wrote: post #125
raquo wrote: post #118

Earlier quoted context omitted.

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. --- Ap…

My experience hasn't matched what you've posited here. I bought a car a couple of years ago, and found that multiple dealers consistently quoted me the highest price for cash and 0% financing deals, and would only structure discounts into the price if I paid interest. A discount for cash was right out. Perhaps cash purchases may have gotten you a discount at some point in the past, but dealers appear lately to be com…

Well the discounts I'm mentioning, both the finance rate and the cash discount, are coming from the manufacturer, not the dealers. For example, here's a Forester at 0.5% rate OR $2K cash discount (might need to choose BC as region): https://www.subaru.ca/WebPage.aspx?WebSiteID=282&WebPageID=2...

Not every manufacturer does this, and not on every model.

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

#206

Post by smnscu »

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.

Here's a good summary of the best way to approach this problem: https://www.youtube.com/watch?v=M0Q5ReCw5Gs

Basically know precisely what you want and do your homework to find what the common discount is, and push it just a little bit. The main point is to be an easy customer.

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

#207

Post by gozur88 »

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…

Getting even more money out of the consumer doesn't need to be a shady thing. Lots of people simply don't have the money to buy a car outright. Or enough to purchase on traditional loan terms.

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

#208

Post by gozur88 »

rootsudo wrote: post #40
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.

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…

>Some dealerships like GM, used to also have a bank. GMAC. Ford w/ FMC.

If you went by profitability, for many years it was probably more correct to describe GM and Ford as banks that had a side business in automobile manufacture.

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

#209

Post by logicallee »

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.

Guy walks into a car dealership. He's dressed well. But the salesman is bored, he doesn't care. Idly, the salesman asks,

"Hello there. So, what kind of car have you been thinking about." He doesn't care.

"Oh no, I'm not here for a car. I was wondering if you had any derivative contracts that bundled those sweet financing contracts you've been floating."

Salesman bolts upright, and goes shifty eyed - looks around to see if anyone heard. He goes to the front of the office and locks the door. Now he's all ears.

"Come with me to the back. You're in luck today."

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

#210

Post by DannyBee »

coldtea wrote: post #168
skookumchuck wrote: post #131

Earlier quoted context omitted.

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…

"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". " All this does is increase the number of documents.

Seriously. How do you think it got to be so many documents, where half are disclaimers and "plain english" warnings/etc for the consumer.

They usually don't hide the actual impact.

In the three states i've bought houses, there is at least one page in the set that literally says "you are taking out a loan for $x your interest rate is x% after 30 years, you will have paid $x for this loan"

Similar things happen for auto financing. What more do you want?

Also note that no amount of plain english is going to make complicated things both simple to understand and correct in all the details. That's in fact, exactly why they are complicated. Most loan documents are pretty plain english these days, so it's usually not overuse of legalese either.

(plus, what makes it easy for you to understand may not be the same as for others).

One does not get to say it's everyone else's job to make you competent.

If you go and implement PaxOS and screw it up, you are welcome to try to blame Lamport for writing impenetrable papers, but most people are going to blame you for not making yourself competent.

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