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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

#51

Post by toomuchtodo »

nostromo wrote: post #25
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…

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.

> I think my current rate is 2% or so... an unthinkable rate not so many years ago.

Its crazy. The financing on my Model S is 1.5%. There's no point in paying cash when financing is almost free.

Sold previous vehicle with equity in it, put all that in index funds, fully financed EV.

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

#52

Post by alexbeloi »

fegu wrote: post #37
charlesdm wrote: post #29

Earlier quoted context omitted.

If cost of debt borrow money / finance

There is a lot more to this than a simple equation. Otherwise we would all borrow as much as we could (about 2% and somewhat predictable) and put it all in the stock market (avg 7,5 % but volatile).

>Otherwise we would all borrow as much as we could (about 2% and somewhat predictable) and put it all in the stock market (avg 7,5 % but volatile).

The 2% rate is that low precisely becomes it comes with collateral (the car).

Interest rates on personal loans with no collateral are closer to 10%, which is the reason people can't do what you're suggesting.

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

#53

Post by bsamuels »

loeg wrote: post #10
dazc wrote: post #6

People are buying cars they can't really afford because the monthly payments seem to be affordable. I think they know it's an expensive way to have a nice car but the alternative (because they don't have the capital) may be buying an old banger or having no car at all.

The article seems to be talking about short term (2-3 year) interest-only leases. There's a middle ground your comment hasn't mentioned. Instead of leasing or buying a used car, consumers can finance a new car (e.g. 5 year loan). It requires slightly higher monthly payments to cover the principal, and you can't switch cars as frequently, but you have ownership of the car (and freedom from payments) after the loan end…

how does road salting affect the value of leasing versus financing a used car?

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

#54

Post by taeric »

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…

Actually, they were making money by selling the loan. Bundle up plenty of these small loans that are relatively safe with a few that are not, and you have a financial package that can be worth a lot of money.

Edit:. I meant to have an "also" in my first sentence.

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

#55

Post by jacquesm »

pmuk wrote: post #30
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…

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.

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

#56

Post by r00fus »

nostromo wrote: post #25
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…

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.

For the loan, if you are wary of dealing with the car company, a credit union can often give you a good rate with a more trustworthy agency. You get pre-approved, and walk into the dealership and walk out with the car.

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

#57

Post by tanderson92 »

taeric wrote: post #54
rootsudo wrote: post #40

Earlier quoted context omitted.

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…

Actually, they were making money by selling the loan. Bundle up plenty of these small loans that are relatively safe with a few that are not, and you have a financial package that can be worth a lot of money. Edit:. I meant to have an "also" in my first sentence.

Not if the auto loan is say 5 years and they're offering 1.5% financing. The 5 year treasury rate is currently 1.76%.

So they're losing 26bp of yield for taking on (the albeit limited levels of and partially diversified away) the credit risk?

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

#58

Post by benevol »

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…

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.

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

#59

Post by pc86 »

benevol wrote: post #58
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…

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.

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

#60

Post by 13of40 »

r00fus wrote: post #56
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.

For the loan, if you are wary of dealing with the car company, a credit union can often give you a good rate with a more trustworthy agency. You get pre-approved, and walk into the dealership and walk out with the car.

If you finance through the dealership you can negotiate a lower selling price because the loan itself has value that they can sell. (At that point you refinance or pay it off. Make sure to ask them to waive the fees for the loan, too.)
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