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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

#61

Post by pc86 »

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…

10-15% for the manufacturer. A dealership is not making anywhere near $2,100 profit on a new $14k car.

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

#62

Post by [deleted] »

cjrp wrote: post #39
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…

My understanding is GAP insurance only comes into play if the car is written off (and makes up the difference between what the car was worth and what the insurer pays out). I didn't think it was designed to cover any shortfall in the hand back price?

[deleted]

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

#63

Post by benevol »

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.

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

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

#64

Post by taeric »

tanderson92 wrote: post #57
taeric wrote: post #54

Earlier quoted context omitted.

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?

Again, they bundled it with other loans.

Now, it probably isn't as bad as it initially sounds. But, it is more complicated.

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

#65

Post by loeg »

bsamuels wrote: post #53
loeg wrote: post #10

Earlier quoted context omitted.

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?

It affects the value of buying a used car vs buying or leasing a new car.

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

#66

Post by yardie »

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.

Look nobody makes you buy anything. But RE is different in that the market isn't completely rational. Your options are rent, own, or sleep in your car. When I was out visiting a town in the Midwest you couldn't rent. There were no houses for rent. Even if a developer started a multi unit rental right now it would still be 6-9 months until it was rentable.

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

#67

Post by cynicalbastard »

pedrocr wrote: post #32
cynicalbastard wrote: post #16

Earlier quoted context omitted.

yes they are. rich people get loans to buy expensive things instead of giving up the cash, often collateralized by their other toys/stock/trust fund/whatever. rich people also overspend, over-leverage, and overindulge just like everyone else. the difference is they call up their banker and accountant instead of filling out a form at the dealership. if you're expecting an asset like a 918 or 911RS or R to go up in pri…

>if you're expecting an asset like a 918 or 911RS or R to go up in price, you'd be stupid to not leverage your cash at a low interest rate and put the rest of it to work somewhere else This only makes sense if your bank thinks it will go up in price and will lend you the money at low rates based on the car itself as collateral. If you're getting the money at low rates based on other collateral (like you suggest above…

uh, no, the bank will loan you the money no matter what, as long as they think you can pay it back or you can put up collateral to forfeit in case of default.

they're not in the speculation game, they're in the loan making game.

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

#68

Post by tanderson92 »

taeric wrote: post #64
tanderson92 wrote: post #57

Earlier quoted context omitted.

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?

Again, they bundled it with other loans. Now, it probably isn't as bad as it initially sounds. But, it is more complicated.

Again, yes that partially diversifies away credit risk. But you're still losing money if you compare to the risk free rate, which is the 5 year treasury on a 5 year loan. Let me just repeat that such a loan is being offered below the risk free rate! It's impossible for bundling to add yield, only decrease credit risk.

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

#69

Post by vonmoltke »

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.

Your absolutely right, but the loan issuers were facilitating people coming to those decisions. I remember when my wife and I bought our house just before the bottom fell out. The loan officer couldn't believe we were only getting pre-approved for a mortgage that was a maximum of 10% of our gross income. She tried (somewhat) to upsell our Max loan balance, but we stood firm.

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

#70

Post by someSven »

nvarsj wrote: post #31
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.

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.

Car companies often have a bancing licence on their own. So they pay some interest but can create more money with these deposits. So it's cheap money for them.

https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

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