Too many people are buying cars using financial products they do not understand
timharford.com
timharford.com
In general people are sitting ducks when it comes to being fleeced by parties with a plan.
I always wonder why schools don't even teach the beginnings of finance to everybody. You'd almost think there is a reason why it explicitly is not being taught.
They want low payments.
They want to flip houses for massive gains in short periods.
The facilitators aren't fleecing them as much as just meeting their needs. Anyone who tells you that you can't afford that car or that home prices won't appreciate to the sky tomorrow isn't going to get your business.
And my school and my kids school teaches basic finance. No one ever remembers it because most kids aren't interested in it.
That's a misleading statement, unless you replace "needs" with "wants".
This! It's crazy the advantage you get from knowing some basic personal finance and economics. Whenever someone younger asks for advice about what to learn to get ahead my two answers are personal finance and programming.
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'd 'lose' the same amount of money _in total_ thanks to that depreciation. Effectively I'm 'renting' the car for the same 'cost' as owning it, just without the upfront payment.
Further, GAP insurance purchased at a one off price of about £100 (which was far more tricky to make sure I got the correct thing) will cover any difference in the 'hand back' price at the end of my term and the value of the final payment. So basically if the car does depreciate below the value of the final payment then the GAP insurance will make up the difference. Likewise if I have an accident etc.
I reject the idea that PCP deals are like 'buying and selling a series of homes using interest-only mortgages'. Cars lose value, always. Whether you buy it outright or not, it'll depreciate in value (save for some hyper rare beasts you aren't going to be buying on PCP anyway). But the article doesn't address this point at all as far as I can see and it's an important part of the value proposition of using these types of 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.
I'd noticed that everyone seemed to be spending more on cars than I felt was wise. After discussing it with a friend with one of these deals he said he basically felt trapped into buying a new car after 3 years.
Though I was single for part of it so it wasn't like I had a ton of options.
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 ends.
I tend to think that buying used is a much better value, especially in areas that don't regularly salt their roads. But it's good to know about all available options.
Yes, and it's important to know that hire-purchase has existed in the UK for years as a method to buy cars, and this new product hasn't, and there's some confusion from the public about the type of product they're buying.
However I think car finance companies are clever enough to include this in their calculations and the second-hand value you get for a car in France is not the same as in Sweden where roads are commonly salted.
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 explain to me how this is functionally different from a fixed-term lease?
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.
In the USA, car leases are extremely common. People understand that they have to return the car after the lease. Hell, even the common advice given is "buy a Toyota, lease a BMW" where the assumption is that consumers should buy reliable cars like Toyotas, whereas BMWs/Mercedes/etc that come with more reliability issues after the warranty period should merely be leased.
Anecdotally, it's also much harder to get approved for credit in Germany. While in Canada, I had banks offering me credit cards with insane limits ($5,000+ for someone in their 20's who finished university but without a job).
In Germany, it was difficult to even get a credit card, and the only card I was approved for has a 2,000 EUR limit. This is with a SCHUFA score of "very low risk", so it's not like I have bad credit.
I would say the lack of credit card usage in Germany is multifaceted:
1. Germany has a high utilization of cash for transactions because cash can't be traced easily. Germans are typically very mindful of their privacy and thus choose not to use Debit/Credit cards for most transactions.
2. Ease of online payments. I can pay via Vorkasse (SEPA transfer), direct debit (SEPA-Mandat), or instant methods such as SOFORT Überweisung.
It's easy to buy airline tickets without a credit card. However some companies do require a credit card to rent a car (e.g. Sixt).
So a credit card isn't really necessary if all you want to do is buy things online.
Previously there were other types of credit based financing available.
I'm personally on PCP which is basically like a lease except that I have an option to purchase the car at the end for an amount agreed at the beginning of the contract.
You can't make this argument when people have a commission based incentive to sell cars.
As demonstrated in the article, even MBA students have trouble choosing the cheapest mortgage.
Having a mixed structure like this, its no wonder that the author calls for
> What auto finance needs — what most consumer finance needs — is for key information to be made simple and salient. Competition cannot work if consumers struggle to understand what they’re being sold and what it will cost. The car market’s heady mix of prestige products and bewildering finance will resist efforts at reform.
And finally, its not a secret that most consumers don't know what they are getting into, or what their rights and recourses are.
which is exactly why consumer protection must exist, and that anything attempting to take advantage of the less sophistication regular consumers have must be stopped, or heavily regulated.
Getting people to sign off on a contract they don't really understand is a great way to get more money out of the consumer than they'd otherwise spend.
Edit: A normal down payment for a luxury car of any brand can easily be 20k up front.
So when I asked the teller to give me a multi-hundred-thousand dollar check, they didn't even blink. "Please enter your pin number sir. There you go sir, have a nice day".
I assume this is very similar. A place selling BMWs is probably used to seeing newly minted millionaires on a daily basis.
In case it wouldn't start the next morning ;)
I think my current rate is 2% or so... an unthinkable rate not so many years ago.
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.
2% is a good interest rate for a collateralized loan, and frankly, often it's not worth putting up the money yourself if you can borrow it (at 2%). Then again, a car isn't (really) an asset with a positive RoI..
And when people do shit like that with home equity loans, etc, everything works great until it doesn't.
(unless your debt is tax deductible ... most car loans aren't)
I think the main benefit of paying upfront is to buy a used car.
all car firms offer lower and lower loans rates to try to get you to buy their product, and eventually the rate reaches 0%
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 you sign at the dotted line.
The fact that you think they make no money on 0/1%, is you falling for the marketing.
Edit:. I meant to have an "also" in my first sentence.
So they're losing 26bp of yield for taking on (the albeit limited levels of and partially diversified away) the credit risk?
Now, it probably isn't as bad as it initially sounds. But, it is more complicated.
The proper analogy is this: treasuries vs. corporate bonds. Here is the current yield spread (difference in interest rate: corporate minus treasury): https://fred.stlouisfed.org/series/BAMLC0A0CM
The spread is always positive, because investors demand extra yield for taking on credit risk.
What, then, is your explanation for why they make these loans?
(I fully ack that just because I feel it, does not mean it is the case.)
Would be curious on numbers to know how successful that is.
Indeed, I mainly expect that is what they are. Convinces people to get in the market for a car, but then actually get something else.
So, my specific question here is what makes it closely related to loss leaders? A concept which actually makes a lot of sense for me. If that was meant in the broadest of terms, then I understand. But "closely" does not imply "broadly" to me.
The question at this point was much more narrowly scoped and around how this is "closely related" to loss leaders. On that, no math was presented.
And if you can finagle to get the subscription on a student discount, it's definitely worth it. Full-prince subscription is debatable.
So in that case, I'll take my 2% external-bank-loan and drop off the check at the dealer all day long.
Cuts your sticker-price negotiation ability a bit since they lose another place to fiddle with the numbers and make money on the backend, but ultimately the end result will be about the same, and it's much less headache to have the financing lined up regardless of which dealer you choose.
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.
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.
And that's before any kind of negotiation (unless you count asking nicely as negotiation). And I mean anything. I've done it in many places. Is there anywhere where that does not work?
Your local Apple Store in the USA.
You can try asking the next time you buy something big. The worst that can happen is them saying no, if you really asked nicely.
PS: I dented a rental car and got a huge bill. I called them up and basically said 'discount please?' They gave me a 20% discount, and that was without any kind of arguing or confrontational talk, just the question. So it's not just for stores.
It's just another choice. There are plenty of car dealers here that offer a "no-haggle" experience if that's what you want.
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.
Probably could have done better on a used car, but for once I wanted to be the one to run something into the ground. Still waiting on that.
In principle, you can pull out a checkbook and bargain back the hit you know they're willing to take on financing.
Less stress? You pay money, the car is yours, problem solved. One thing less to worry about.
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.
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Apart from that there could be lots of special circumstances (making a quota, etc.) that could explain the discount if the offer was made to you personally as opposed to being advertised to the public.
Not every manufacturer does this, and not on every model.
I turned down a 0% offer and took the cash. I then went to a Credit Union and got a loan at 2%. The interest paid over the life of the loan totaled less than the $750 upfront.
The finance person at the dealership wasn't too happy once he realized I can do math.
I have a 0%, 60 month loan on my LEAF. Having such a loan requires me to carry collision insurance, so I treat the insurance company's profit on my insurance as the financing charge that I'm paying every month. (I otherwise wouldn't carry collision, but of course collision insurance is worth something, so I am only "really" paying the spread between that value and its cost.)
About halfway through the loan (when the imputed financing charge interest goes up because the loan balance went down), I'll probably pay it off and drop collision.
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.
Sounds fun to pull out a large stack of actual cash, though.
Stimulating digital payments is another method
http://www.zerohedge.com/news/2017-01-27/europe-proposes-res...
EDIT: apologies, didn't saw see sibling comment; leaving the comment w/ the URL for reference on the directive details.
At the end of it I told them I had the certified check as previously agreed for the full amount due on the vehicle, handed it to him and told them I was walking out the door in 10 minutes and they could call the police and report it stolen if they wanted to. It was unexpectedly difficult to close up a seemingly simple transaction with pre-agreed upon terms.
The GM asked where she stripped.
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 had a gun held to their head to sign a contract.
Loan officers just facilitated what their customers already wanted.
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 rating institutions were complicit too - they knew the products were crap but knew the customers (lending institutions) would go to another one and so wrote the bogus ratings. See the players in the game got paid. The snooks got screwed.
Bill Black, who prosecuted the Savings and Loan Crisis, and sent many fraudsters to jail reviewed the 2008 crash and was incensed at the lack of prosecution.
The consumers saw what they wanted to see. Very few consumers perfomed due diligence. The old proverb tends to be true: "If something seens to be too good to be true... It probably is." Fraudsters have taken advantage of the gullible throughout human history. Our generation has no excuse: we have unparalleled access to information and most are too lazy to put the effort in to check these things out our to hire competent counsel who work for us not the seller. How many parents and students understand the debt they take on for college and the expected ROI???
But companies spend vast amounts of their revenue to manipulate you in to doing so, or perhaps you haven't heard of advertising?
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.
Though there were assurances that the same thing wouldn't happen since loan issuers were reining themselves in, that cars were far more liquid than a house, and easier to seize on a failed loan. Of course if it's already in the news, it's too late to act.
The buyer behavior was rational, at least on the surface, because homes almost always appreciate over long periods and were appreciating like crazy during the bubble. We are pattern matching monkeys, all of us, and it's only the few who can see the bigger picture during those times.
Many didn't want to miss out on the big payday buying $300k homes and flipping them for $500k a few years later. All bubbles accelerate bad decisions/behavior and it's really difficult (if not impossible) to legislate incentive driven behavior away. It's obviously possible to not legislate bad market incentives, but we flunked that one to.
There's obviously higher return investments, but they provide those returns by taking more risk, and more variance.
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.
At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?
[1] Consider: the banks, the title company, the county, all want hand signed documents. But we accept computerized voting machines to manage elections.
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 read them. Amazing. Although this would visibly annoy the escrow officer.
You did the right thing by having a lawyer review it if you didn't feel confident about it. There's no excuse not to if it is a large transaction.
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.
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.
Attorneys specialize in everything, the fact that attorneys specialize in real estate does not make every real estate transaction difficult, or require an attorney.
There are attorneys who specialize in speeding tickets. That does not make understanding the laws around speed limits difficult. If just means it's an area where attorneys believe they can make money by building a niche. That is not a measure of the complexity of that area, but of a large number of factors. (same with DUI)
In fact, attorneys specialize in real estate to handle the complicated things, which are not closings. So your point kind of goes against this argument you keep trying to make.
I'm also not at all sure what your analogy to x-rays is supposed to be proving. It seems very strange
x-rays have no context and to people not familiar with at least anatomy and a number of other things, and are subject to different opinions.
On the contrary, real estate contracts, which are usually boilerplate plain english, only require understanding english. They may take a while to read, but they don't require specialized training. They are generally not subject to different interpretations, that's precisely why they are written the way they are!
There is no equivalent for x-rays that could make laypeople competent.
This is bullshit, they are not complicated legalese. Additionally, the vast majority of states require someone who can explain the documents to you be there at the closing.
Some require they even be lawyers. Even those that don't, have provision on what must happen. For example, in California, whoever is doing the closing will stop on each document, explain what the document is and what it says, and ask you if you have any questions, before proceeding to the next one.
I don't believe, when that happens, one can reasonably complain they didn't have a chance to understand the documents.
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".
And in general, as I pointed out here, such contracts tend to be invalid in court. However, signing a piece of paper in plain english certifying saying "I read it" when one did not ought to mean something.
A legal doctrine where one can not bother reading contracts and yet get them decided in favor of ones imaginary terms doesn't sound like a workable system. The whole point of written contracts is so there's a record of what the terms were and what was agreed upon.
Having to agree to dozens of pages of contract every day just to do seemingly ordinary things like using websites or ordering stuff online doesn't sound like a workable system either.
If that was the case, EULA also should "mean something".
I expect this is legally mandated, and the question I have is which states are preferring to let the dealers prey on people?
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.
Perhaps you didn't get what I said.
That information should be displayed (by law) with prominent letters as big as the base price, under any sign/ad/etc which shows the latter.
Not to be buried in another document.
They note the currently (and for the mid-term future) values.
It's 2017, it's not like ads are written in stone and can't be altered when the facts change.
You say the point is:
"That information should be displayed (by law) with prominent letters as big as the base price, under any sign/ad/etc which shows the latter."
I'm saying: It already is Along with everything else other people considered to be just as important to make sure everyone knew. :)
IE The thing you want, has already happened. You cannot find it, because not everyone agreed with you about what is the most important, so now you have 50 pages of the base price and the other important thing in big letters.
> but most people are going to blame you for not making yourself competent
Shouldn't it go both ways? Businesses might be confident with your assertion and might rely on it to do business. But blame is the wrong attitude if you go in holding that opinion it's fraud. If you let someone sign a contract although you are sure they didn't read it, that's fraud. Simple as that. Why do I get weird looks when I actually start reading a contract I am about to sign?
As i mentioned elsewhere, the vast majority of states very explicitly require education as well!
". If you let someone sign a contract although you are sure they didn't read it, that's fraud.'
Actually, it's not by any definition of fraud. You have not intentionally deceived anyone of anything. It would only be fraud if you intentionally told them the wrong thing, or deliberately tried to get them to not read it, or something more than "knowing this person has not educated themselves". We don't have a lot of thoughtcrimes.
It may be a void contract, but it's definitely not fraud!
" Why do I get weird looks when I actually start reading a contract I am about to sign?"
I don't, so i'm not sure. In fact, in any real estate transaction i've ever been a part of, if i say "hey, do you mind if i take a few minutes to read this page more closely and ask you some questions about it", the answer i get is not "rolled eyes", it's "absolutely, that's what i'm here for"
And in any transaction I put the first blame in the person which had the more information in advance. It's their duty to inform the other, especially if they are the one's receiving the money.
Taleb has written something close to that recently:
I worked once for a classic U.S. investment bank of the prestigious variety, called “white shoe” because the partners were members of hard-to-join golf clubs where they played the game wearing white footwear. As with all such firms, an image of ethics and professionalism was cultivated. But the job of the salespeople (actually, salesmen) on days when they wore black shoes was to “unload” inventory with which traders were “stuffed”, that is, securities they had in plethora in their books and needed to get rid of them to lower their risk. (...) Salesmen hawked how a given security will be perfect for the client’s portfolio, how they were certain it would rise in price and how the client would suffer great regret if he missed “such an opportunity”, that type of discourse. Salespeople were experts in the art of psychological manipulation, making the client trade, often against his own interest, while being happy about it and loving them and their company. One of the top salesman of the firm, a man of huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn’t get upset when they got the short end of the stick. “A customer is born every day” was his answer.
Which brings us to the notion of asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? The ancient Mediterranean and, to some extent the modern world, seems to be converging to Antipater’s position. While we have “buyer beware” (caveat emptor) in the Anglo-Saxon West, the idea is rather new, and never general, often mitigated by lemon laws. So to the question voiced by Cicero of a debate between the two ancient stoics, “If a man knowingly offers for sale wine that is spoiling, ought he to tell his customers?” , the world is getting closer to Diogenes position of transparency, not necessarily via regulations as much as thanks to tort laws, one’s ability to sue for harm in the event the seller deceived him.
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.
I would blame the consumers if they could take their contracts home, consult with family, financial experts, etc. But, have you ever been in a sales room? Most people are pressured to sign ASAP and dealers generally refuse to print out contracts until after they're signed.
The exception to the rule here would be payday loans which have some horrible outcomes shouls you fail to pay them back on the agreed date. These were being legislated for the last I heard, so I'm not sure if they still exist.
The other game in the UK is targeting the poor with silly rates of interest in the knowledge that many of them simply won't pay. Technically they're high risk loans and thus somewhat valid but there is an argument that the likes of brighthouse shouldn't exist and that people without jobs shouldn't really be given finance to buy a tv at over double the retail cost.
Yup.
> Most people are pressured to sign ASAP and dealers generally refuse to print out contracts until after they're signed.
I refuse to sign until I see a printed copy. Just remember that the dealers want that sale a lot more than you do. If they aren't being reasonable, get up and walk away. They'll change their tune very quickly.
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.
Today, car dealers sell consumers to banks using cars as bait people. Exploiting people's ignorance of dense financial/legal contracts seems extremely abusive to me.
"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."
Told them I would, but not for free. A lot of people died for my right to sue them in court. I asked for and received an accessory they sell for $180...
They were confused...
I went to another dealer the next week that hadn't yet added that toxic language to their contracts.
I just consider myself fortunate that I still had the option of going with another dealer. I don't think it is possible to find a bank, phone, or internet provider without an MBA clause.
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.
I was expecting some discount for paying cash since the interest rates were all less than 2% (which barely covers inflation). However they were completely indifferent to whether I paid cash or financed so I financed.
(I also really hate to say this, but if you're female and don't like confrontation, bring a male friend and act like he's the one buying the car. It's a male dominated industry that is very sexist. If you're a strong person and can handle it by all means go for it, but expect them to be pushy and talk down to you. I'm a white male, and I hate dealing with a lot of them. I can't imagine, although I've heard the stories, of what it's like not being in the privileged class.)
The real truth is that to the dealership, this additional money doesn't really matter in the big picture. They make almost no money from selling cars. You ever notice how all the dealerships have a service department? That's not by coincidence. It used to be (and probably is still close) that 90% of all revenue from a dealership is on service. Getting money from warranties; getting money from people who only trust where they bought it etc. They want to sell the car, so they can get the maintenance. They won't sell for a loss, and they'll take you for what they can, but really they're in it for you as the long term support. Also, the car salesperson has no real influence over the price you get. That comes from the general manager behind the desk. (A long time ago this didn't used to be true, but dealerships wised up that you don't trust people on commission making decisions. It's quite possible the sales people don't actually know the true cost of the car to the dealership.)
You want to hear about people signing things they don't understand? I really wanted to scream at people after I heard this story. There was a hispanic couple looking to buy a car and they didn't really understand English. The car salesman told them if they signed the contract, they could drive the car as much as they wanted. He neglected to mention to they actually had to pay for the car, and so they took the deal. You can guess how that worked out. Course the salesman didn't care; he got his commission. I'm not saying they're all like this, but some of them are complete trash.
I'm losing my ability to say "obviously they can't mean that".
Uh, OK. I checked the paperwork carefully and it was mathematically as-stated.
Did you find evidence of the hypothesis that it's a kind a "tripwire" to get you to accidentally miss a month and trigger enormous penalties?
I'm still baffled as to why/how they decide to run programs like this. Maybe it gets them information about when I contemplate selling the car (as I'd maybe have to ask the payoff amount)?
This kind of credit for cars / housing / uni / whatever is just not helping people afford things they would otherwise defer buying. It's predatory. It's pushing up the price of items. It has no place in our society. It should be tightly controlled. Finance is pulling forward demand to get tomorrow's bonuses today and to hell with the consequences tomorrow.
If we want a better world we have to regulate debt issuance. Yes some kids from poor backgrounds can't buy a nice car even though they are doing a law degree at Harvard and will be able to cover it no problem in 3 years time. The flip side of the coin is far more damaging.
We should stamp out these cockroaches.
I think you're underestimating how poor most people are. 60% of Americans wouldn't be able to cover an unexpected bill of $500[1]. Most people just don't have any money saved, or money left at the end of the month to save any. This isn't about young people buying nice cars; it's about the majority of people buying any car. Clearly cheap credit adds to the problem, but if the ability to borrow disappeared overnight a lot of people would have tremendous difficulties.
[1] http://money.cnn.com/2017/01/12/pf/americans-lack-of-savings...
I then asked if I can get the loan and immediately pay it off, and the dealership became sad. Apparently, Mazda financing gives them the 2000 dollars, but if the customer pays off the loan in less than 6 months, the dealership losses the money (on other states, they'd probably have an early repayment fee on the loan, but that's illegal in California).
So, I took the loan, paid off all but a thousand dollars, and now feel silly paying off the remainder over 6 months.
So for example they might quote you a price on the car that they know is below average asking price from dealers in the area and give you a typical good interest rate on the loan but then way low ball you on your trade-in.
To avoid getting a bad deal I always do the following before setting foot on the dealers lot.
1. Go to CarMax or similar place ahead of time and get a quote for how much they would buy your car for.
2. Be ready to pay for the car in cash or have a loan pre-approval lined up from a secondary source for financing outside of the dealership.
3. Know what the car you are looking at sells for in your area.
4. If you are buying a new car, shop towards the end of the month. Manufacturers offer incentives to dealers based on the number of cars they sell per month. So say a dealer needs to sell 50 cars a month to get the incentives which are $500 bucks per car. If they are at 48 cars sold with two days left to go in the month they are a lot more likely to sell you a car at a lower price and get to 50 so they don't lose out on the incentive payments for the 48 cars they have already sold.
Once you are at the dealer make sure you negotiate each of the 3 parts of the deal separately. First agree on the price of the car. Then entertain their offer of a loan and for your trade-in if they are as good as or better than the alternatives take them other wise turn them down.
As it turns out, they receive a kickback from their financing partners if the loan is held >= 90 days. So, in the end, I got the car I wanted at the price I wanted, plus some cash back from AmEx, and minus a whole bunch of wasted time by everyone involved.
All I could do was patiently ask them "why would I do this? Is it not still more of a cost to me, even if a small one?" They acted really confused and upset but I understood that this was simply a sales tactic to make me feel as if I was making some sort of mistake by not paying some small amount of interest in addition to the cost of the car.
I eventually got a bit irritated as it was making things take a lot longer than they needed to. I just told them, "look, we already negotiated a price and I have the check written out right here. I have no need to finance a $10k car right now and I would like to just finish the sale."
They weren't quite as friendly after that but hey...it's an adversarial relationship and I'd been perfectly cordial up until that point. I was already paying $10k for a car they likely got for half as much as a trade-in anyway.
The public could reasonably assume that the government might provide guarantees for products in the first group, in the way they do for bank accounts. Products in the second group would explicitly be excluded from any government guarantee - if you passed the exam, and want to risk your own money, totally up to you, but don't come expecting your fellow citizens to bail you out if things go terribly wrong later.
So for example, interest-only home mortgages are almost always a bad choice for most consumers, so they would probably be in the second group. So you could still get them if you really wanted one, but you would have to prove you knew what you were doing, and were willing to give up any hope of a government bailout.
Just for future reference, if anyone lets you make an infinitely leveraged 500,000 dollar bet that you can walk away from at any time, you take that bet.
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.
1. Take it or leave it, fine print consumer contracts, which includes most loans. These contracts should very limited in power / heavily regulated.
2. Negotiated contracts, where both parties sign, both parties have the power to negotiate for different terms, both parties have legal representation. These contracts should have very little regulation.
And if you agree with that, then let me tell you a story about the healthcare industry...
This story is UK based, is there no Truth In Lending type act to help simplify these contracts into terms people can readily understand? A recent car purchase I made in Georgia (US) was very easy to understand, all the numbers on one sheet.
In addition when you consider the prius' high gas mileage, low maintenance, high lifetime (over 500k miles) and high resale value it's a great deal if you're planning on driving quite a bit.
Manufacturers are increasingly offering limited edition cars to cater to this kind of investment.
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 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. at this point it becomes a business move, not a trip to the mall. it's like financing a construction project.
do you think they buy jets and yachts and big homes in cash also? of course not. they setup holding companies and finance the purchases, and then charter or rent the asset out to make some of the money back and to pay the crew of people that run these types of properties. that's why you can rent an amazing vacation home for $1k a night, or spend a few days on that yacht with a bunch of friends for $5k, or rent a ferrari for a few hundred bucks.
rich people are exceptionally good at monetizing and leveraging facets of their life that look like giant expenditures to you or i. poor people try to emulate this behavior, and meet their financial ruin, because they aren't savvy or rich enough to make it work.
> 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.
(see, e.g., https://www.whatcar.com/news/the-10-most-popular-cars-in-the...)
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) it makes no difference if the car value goes up or down. If you think you can make more return on your other investments than the loan rate you leverage, the rise or fall of the value of the car is irrelevant.
they're not in the speculation game, they're in the loan making game.
Banks are actually very much in the speculation game, which is why different people get different interest rates for the same loan, they speculate that the person with the lower interest has a better chance of paying back the loan. See also the financial crisis of '08
no i'm not. i said condition B is often present in condition A, and that given A, you'd be stupid not to do B.
NOT that A necessitates B or vice versa. that's something you just made up out of thin air.
Are you or are you not saying that if the car appreciates you should use a loan to buy it? That's what I read from this sentence at least:
>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
What I'm saying that unless you can get that value appreciation to make the loan cheaper it doesn't matter.
Say you have 200k$ in cash and are considering buying two different cars both costing that amount. One appreciates and after 5 years is worth 300k$, the other depreciates and after 5 years is worth 50k$. Say you also have a bunch of other assets (a house, a boat, etc) that you can use as collateral to borrow the 200k$ at 10% over 5 years. If you take the loan after 5 years you've paid 250k$ for the car, doesn't matter which one. If you don't take the loan you pay 200k$ up front for the car, doesn't matter which one. The decision to take the loan would only be more attractive in the appreciating in value car if you could convince the bank to also use the car as collateral, reducing the risk of the loan, and giving you a lower than 10% rate.
> Porsche Financial Services - a trading name of Volkswagen Financial Services [VWFS], with finance provided by VWFS - offer different finance plans across the Porsche model range. To find the right plan for you from a selection including Personal Contract Plan, Lease Purchase, Hire Purchase and Contract Hire, simply explore the options below or contact your local Porsche Centre for an individual and personally tailored quote.
http://www.porscheawards.co.uk/carfinance
etc etc.
That Porsche finances a bunch of more affordable cars doesn't provide much evidence about how many people finance $500,000+ vehicles.
What's your "lots" in that context?
We also get told that these 'halo cars' cost the manufacturer 'twice' what they retail at. So the Bugatti creations of the VW group 'apparently' cost far more to research and develop than was recouped over the car sales. The project as a whole being like A380 financing - the R+D never paid off. This 'legend' goes back to the first supercars for the road - the Porsche 959. Even the rebooted Ford F40 was with this same legend.
What is going on here is a genuine collectors market with vehicles actually getting raced, repaired, rebuilt and polished. This is an expensive hobby.
Beneath this market something else is going on and I am sure finance has a lot to do with it. High end SUVs are desirable for people who like such things but they must depreciate faster than I get paid and they don't seem to have the mechanicals to last more than 5-10 years on the roads. Where do all the old Land Rover group luxury products go? Maybe there is some part of Serbia or somewhere that takes all these vehicles and they serve out a long and dutiful life, but I suspect not. The only way I can see these products as viable is if the manufacturer offers the finance to make it so.
http://www.bbc.co.uk/programmes/b08q31ct (about 33 min, towards the end of the show)
It is true however that it's a really small market compared to housing, car companies also aren't critical to the economy as a whole in the way banks are but it would still be bad.
This is simple. Cars (especially new cars) depreciate super-fast; and houses have appreciated at crazy rates at least for the last few decades. Don't put your money in a fancy car.
Dangerous equipment should have warnings so that you don't lose your fingers and financial tools should have warnings so that you don't lose your shirt.
A decade ago I bought a Fiat (in Brazil) and was offered financing at 0,99% a month. This was worth it, as fixed income investments were paying more than 1% a month. Except that the administrative fees made the effective rate something like 1,99% (which was not worth it). The salesperson argued that I could pay the fees in installments too. It made me angry that they are allowed to do this to people who can't do the maths.
How would this work? Isn't the contract itself supposed to be the warning? Obviously contracts can contain a lot of legalese and potentially unenforceable language that makes them difficult for most people to interpret, but that language is also necessary to specify the contract at the level of detail the law requires. If you require a warning for the contract, how do you ensure that the warning is sufficiently authentic?
PCPs, in particular, are complex as far as consumer finance goes, and a lot of people seem to sign them thinking they're a normal loan. An analogy seem to be the (now thankfully almost obsolete) endowment mortgages, where you took out an interest-only mortgage coupled with an investment product which was theoretically meant to pay off the principal on maturity. These ran into difficulty when inflation dropped to practically zero for a decade, and lots of people who had them thought they just had repayment mortgages...
But like leases, it sounds like the problem with the PCP is the financial complexity. The option at the end of a lease has actual value, and it's difficult for a consumer to value it properly. The interest being charged is also hidden, making it easy to hit you with a far higher rate.
If you could buy a car on a PCP where the finance costs and end contract purchase price were reasonable and market competitive, it might be great. After all, a car shouldn't always be a forced savings plan where you are required to own it after 4 or 5 years.
That would put a lot of pressure on the industry indirectly to be more transparent to the average consumer. I would think anyway. I don't have anything except anecdotal evidence and a gut feeling to back this up.
I think car ownership being needed outside the major 12 cities (Lookin' at you NYC!) that have good public transit is a national crime in and of itself.
The maximum exposure during the period of a lease is whatever the excess on the policy is.
The GP comment can't be applicable to the UK.
You are required to get your own fully comprehensive insurance, and can select from the whole market. The vehicle will not be released to you from the car dealership without proof that you possess such insurance.
Please declare which country you are talking about, as the article described the UK and your claims are not true with regard to the UK.
In each case I only got the value of that vehicle as per the lowest price the insurance adjustor could find, taking the mileage and age into account. That was never enough to buy something of equal value to me, and I assume totally inadequate to pay off the outstanding loan amount.