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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

#191

Post by tanderson92 »

taeric wrote: post #189
tanderson92 wrote: post #161

Earlier quoted context omitted.

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.

I guess my cynicism has just grown to the point that I feel some industries have settled on never taking a known loss. That is, this seems like it is the easy answer, and is certainly what folks would do in the small. At large, though, I feel like they are able to have other options. (I fully ack that just because I feel it, does not mean it is the case.)

I explained how they're not really taking a loss, since it increases their profits overall. Companies make these decisions frequently; a closely related concept is a loss leader.

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

#192

Post by hartror »

Tim Harford does a fantastic podcast called 50 things that made the modern economy. It is some of the usual suspects but mostly things you would not have considered before. Highly recommended.

http://www.bbc.co.uk/programmes/p04b1g3c/episodes/player

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

#193

Post by skookumchuck »

cmurf wrote: post #176
skookumchuck wrote: post #139

Earlier quoted context omitted.

> No non-lawyer is competent to understand all real estate transaction documents. I understood them well enough. It isn't that hard. The misunderstandings people would complain about were not about subtleties or legal hare-splitting. It's also established legal doctrine that a contract written in ambiguous, confusing, or tricky language isn't going to hold up in court. Judges take a dim view of that. I also actually…

A house is, for most people, a very large transaction. Saying "it isn't that hard" considering attorney's specialize in real estate is like saying "reading x-rays isn't that hard". Had I not had an attorney present, it would have taken me all day, instead of 4 hours of reading stuff. It wasn't a matter of confidence in myself, it was a matter of having less than 100% trust in everyone else present.

I should add that it isn't hard for ordinary real estate transactions, as the contracts are pretty standard boilerplate. If there's anything unusual about it, such as easements, water rights, unclear borders, weird covenants, by all means get a lawyer involves. If you're at all uncomfortable or confused by the deal, get a lawyer. Don't wing it and then blame the other party.

If you're buying an $800,000 house, often the most important investment in a person's life, spending a day reviewing the deal is a trivial incremental investment.

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

#194

Post by GavinMcG »

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…

That was what my car loan paperwork did. It had a table with the negotiated price, the APR, the interest over the term of the loan, and the total price.

I expect this is legally mandated, and the question I have is which states are preferring to let the dealers prey on people?

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

#195

Post by valuearb »

johnminter wrote: post #142
valuearb wrote: post #88

Earlier quoted context omitted.

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 rat…

i understand how collateralization works, i used to invest in tranches. You are confusing the fact that MBS buyers didn't do their homework, with the fact that home buyers were greedy specifically because MBS financing enabled them to be.

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

#196

Post by skookumchuck »

ccrush wrote: post #180
skookumchuck wrote: post #174

Earlier quoted context omitted.

If they cost $50,000, you bet I do. Lesser ones, if I sign my name, I do. Click thru ones on fairly worthless software aren't binding.

Look up the names Schwartz and Aurenheimer. They either ignored the click through EULA or deliberately broke it. Charged with CFAA felonies over it. One got prison for many years. The other killed himself to avoid it as well as to protest the insanity of having criminal charges brought against them because they broke the EULA terms on a web site. Both used scripts to cycle through ID numbers in a web page. This is wh…

Aurenheimer knew what he was doing was legally wrong: https://www.wired.com/2012/11/att-hacker-found-guilty/ although the charges were grossly excessive.

Schwartz knew he was doing something legally wrong, because he hid in a closet to do it. (The charges against him were also grossly excessive.)

I don't think these cases support your notion that EULAs were the issue. Nor do I think these extreme cases are cause for EULA concern for someone using software as it was obviously and reasonably intended to be used. Disclaimer: IANAL, and if you want real legal advice, go ask a real lawyer. Taking legal advice from the internet is foolish.

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

#197

Post by will4274 »

maxsilver wrote: post #163
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.

> 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. Ob…

The difference here is that many of the people caught in the mortgage crisis could afford homes, they just couldn't afford the really nice homes that they bought. People who's finances would reasonably put them in a $250,000 home were instead buying $750,000 homes on the idea that the price would only go up and the loans were cheap.

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

#198

Post by shimon_e »

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.

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

#199

Post by guntars »

maxsilver wrote: post #163
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.

> 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. Ob…

There's plenty of affordable housing around, it's just not in places people want to live. Some markets require you to shell out 50% of your income on housing, but it's not like people have no choice. They do it because overall it's worth it to them. If they didn't, there wouldn't be enough takers.

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

#200

Post by dazc »

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…

The traditional way of financing a car purchase in the UK is a hire purchase agreement where a large deposit (usually half the value of the car) is paid upfront. This can be cash but is often covered by the part exchange value of the customer's existing car.

At the end of the term the customer owns the car outright. And, from the outset, he has some equity in the car by means of the large deposit.

The author of the article is talking about contract hire schemes where there is a monthly payment but, crucially, the deposit required is often only 2 or 3 months advance rental.

At the end of the term the customer owns nothing and can be liable for minor damage. The contracts also can have a mileage restriction which is well below average.

So, sure, it's no different to a fixed term lease. These have been widely available to businesses for some time in the UK. The change is that offering these deals to the general public has now become much more common.

The author is suggesting that people are not sufficiently financially sophisticated to understand the implications of this arrangement if their circumstances change unexpectedly.

I disagree. I think most people know what they are getting into but now they have the opportunity to drive a new car they would never have been able to afford otherwise any concerns are put to the back of their mind.

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