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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.

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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.

it's just another form of competition right?

all car firms offer lower and lower loans rates to try to get you to buy their product, and eventually the rate reaches 0%

It's mostly a function of the general interest rates.

If that was the case, why stop at 0%? Why not negative?

would probably confuse people

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 you sign at the dotted line.

The fact that you think they make no money on 0/1%, is you falling for the marketing.

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.

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.

On that loan, yes. But just like nobody would buy magic cards if they knew all of them would be commons, adding just a few rare high value cards will pull the rate that people will pay for the others up. But only as a bundle.

You are incorrect and your magic analogy is flawed.

Do you have recommended reading or links to an overview of how it actually works?

A student subscription to the Economist perhaps?

That my analogy is flawed is not exactly surprising or helpful. It is an analogy and only intended directionally. At best. You two seem to indicate it isn't good at even that. Which is a claim I'm interested in knowing more about.

I explained it above. The dual risks in a loan are credit risk and term risk (look those up and learn about them). Since the term is 5 years, the investment with no credit risk is the 5 year treasury (this is the credit risk-free rate). All loans have credit risk. Bundling loans does not eliminate credit risk (this is what 2008 taught us), though it does reduce credit risk. Selling loans with rates below the risk-free rate has negative expected return.

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.

I asked you the wrong question, then.

What, then, is your explanation for why they make these loans?

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.

Thanks to both you and taeric for keeping the exchange civil.

If you ever see me being uncivil, please call me on it! I consider it a safe assumption that I was mistaken on anything I'm not an expert on. And on those things, I think the odds might actually increase. :)

Same as with Nespresso machines, the machine is cheap (Probably sold at a loss but I have no numbers on that) because over a lifetime the customer will buy grossly overpriced capsules which will make the money back and more. Game consoles work the same way early in the cycle.

What do folks buy as additions to their car? I could see an argument for taking it to dealer's shop. They certainly do what they can to lock out other mechanics.

Would be curious on numbers to know how successful that is.

A loss leader has lock in. How does that relate to cars?

I did not state that what the car companies are doing is offering the loan as a loss leader; I am saying it is a related concept. I was offering it to help in understanding that companies make tradeoff decisions of this kind. Please don't take my comment as making a direct equivalence between the two.

Even directionally, I don't see how it is similar. I could see it being like door buster sales.

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.

I give up.

There is no need to "give up." My questions are not trying to prove you wrong, but to help educate me.

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 problem is that you _seem_ to have a hard time grasping the very simple math involved.

What math has been presented?

https://news.ycombinator.com/item?id=14477777

I fully ceded that point.

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.

Sorry, I didn't meant to indicate any of that. I just meant to say that you should be reading the Economist for this kind of stuff.

And if you can finagle to get the subscription on a student discount, it's definitely worth it. Full-prince subscription is debatable.

The manufacturer is subsidizing the interest. It's 1.5% + cash payment.

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

If you don't get your loan through the dealer, it's the same as buying in cash from their perspective.

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.

I've always locked in the price and flat-out refused to talk about how I was paying for it until the price was agreed upon.

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.

Why does buying a car in America involve so much (or even any!) negotiation at all? I guess it's a form of price discrimination?

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.

It's normal in Europe. I've never paid the sticker price for a car.

Buying anything above, say, 100€? Smile, say 'discount?' and they will through in something for free or give a few percent off.

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?

> Is there anywhere where that does not work?

Your local Apple Store in the USA.

can you expand on the "anything"? I'm having doubts that I can negotiate the price of eg. a TV bought in a hypermarket (Walmart, to give a US example) ?

Hm, I haven't tried that yet, but I think it is possible. It usually works very well in specialized and non-chain stores. If you cannot find a salesperson with any decision power it might be harder.

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.

Literally, the only things you negotiate in the US are cars and houses. Not groceries nor clothes nor millions of other things. Perhaps a few minor things here or there.. but we pretty much just stick to the basics.

Healthcare. If you ended up paying from pocket.

Mattresses are negotiable. I offered to pay cash and they took like 40% off the price. I was kind of dumbfounded.

Did they put it through the books. They may be able to sign it off as damaged goods and pocket the cash hiding the sale from revenue and upstream managers.

First time I bought a mattress I wasn't aware of this. Second time, I got the bedframe, box spring, and mattress protector included, and still managed to knock ~ %20 off the price. I try to negotiate everything now, and have had some measure of success. I will admit that negotiating is mostly, to me, a fun game, rather than a way to save money.

That depends on how broadly you define negotiating. For example, price matching and acceptance of competitor coupons are both forms of negotiating. But you're right, even for retailers that offer price matching or competitor coupons, the vast majority of purchases don't involve any form of negotiating.

>Why does buying a car in America involve so much (or even any!) negotiation at all?

It's just another choice. There are plenty of car dealers here that offer a "no-haggle" experience if that's what you want.

>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.

That's also for tax dodging. Banks don't own money only lends it at risk, maker don't earn money keeping margin low, win win

Yep, my 2012 Civic was bought on 1% financing. Paid off now, still runs great, and I kept the would-be total payment in cash in retirement accounts.

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.

You'll be waiting a very long time on that one.

I have a 2003 Pilot with 250k miles. It will die someday, but it's lasted about 5 years longer than I expected it so far!

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

That's not how fractional reserve banking works..

Bank are paying for deposits, and create money wjile the deposits are the security. Simplified.

Virtually every car dealer partners with real banks to handle loans. They certify your car as collateral, and essentially apply on your behalf, and you walk out the door with a loan from JP Morgan, Chase, or whereevs.

My experince in Europe was different. I actually looked into Wikipedia for a Honda bank, and it exists. I also know Volkswagen bank.

Speaking specifically to Toyota's 0% deals, I bought a Toyota a couple years ago, and at that time there was a cash back incentive that was mutually exclusive with 0% financing. This car was pricey enough that 0% was still a better deal, but for most of what Toyota sells it's a worse deal.

Most automakers do something similar now. Regular financing is so cheap now it almost always makes sense to get the cash back deals from the manufacturer rather than get the 0% financing.

Those below-prime numbers are being subsidized by the price of the car. The calculus isn't any different for a car dealership than it is for a consumer: if it made more sense to invest that money than loan it out with a car for collateral, the dealership/bank would have done the same thing. They give you low rates because they want you to buy the car at the price they ask.

In principle, you can pull out a checkbook and bargain back the hit you know they're willing to take on financing.

This type of consumer credit's also seems to exist to lure enough people other to other products of the cooperating bank. It doesn't need to be priced in into the product and could actually be paid for by the bank as lead generation. Gullible people might fall for the types of "Keep your monthly payment rate and afford a vacation" while they are predatorily increase the actual interest rate.

Those incentives are there to keep the cash flow going. The car market is seasonally cyclical, but manufacturing is most efficient in a steady state. Those deals are there to keep the pipeline full.

> why wouldn't you get a 0% finance deal over paying in full?

Less stress? You pay money, the car is yours, problem solved. One thing less to worry about.

I bought 0% Apr from Toyota. It's not really 0% though, because (at least in my case if I would pay cash, I would get $1,000 off). So this is equivalent of paying $1,000 of interest up front, just masked to look like there is no interest.

It's a little worse than that as you pay generally pay some form of sales tax on the purchase price not your interest payments.

Plus the 1000 if invested would probably be say 1150 after five years.

Those 0% loans often have costly penalties if you're late on a single payment. They're banking on the odds that you'll screw up and be late somewhere along the line.

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.

---

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.

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 completely uninterested in them.

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.

What is stopping you from agreeing to a loan and then paying it off in full a week later?

Many of the 0% financing also have a "or $750 cash-back" offer as part of it.

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.

> why wouldn't you get a 0% finance deal over paying in full?

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.

Just bought a car that I could have paid for cash but they offered me zero % financing over three years, with zero down.

When you guys say "cash", do you mean "not credit"? Because my dealership did not seem to appreciate it at all when I gave them 30,000 euros in stacks of 50 euro notes.

Yea, often when people say "cash" they're just referring to an instant asset transfer (cash, check, eft, etc). Usually I would expect a transaction in a dealership be a check or some kind of electric transaction.

Sounds fun to pull out a large stack of actual cash, though.

It was fun for me. The salesman didn't seem to enjoy it, but, in my defense, I had told him I didn't want to wait a weekend for the SEPA transfer to reach their bank before I could get my new car.

Cash management is a PITA. Plus SAR reporting.

In France that would be illegal-- cash can't be used for transactions over €1000 because they're afraid of terrorism apparently.

Interesting. Was trying to think of something common that could exceed 1000 euros and monthly rent came to mind. I'm guessing mom-and-pop landlords expect check and/or money order as typical payment method, or wire transfer?

In UK it's normal to do a "standing order" which you set up either at the bank counter or more usually through your online banking. Other methods have transaction charges whilst this does not, you can do one-time transfers this way too.

Limiting cash transfers isn't only about terrorism, it's about limiting possibilities for using your "black money". Governement doesn't want to lose income, are they ;)

Stimulating digital payments is another method

Hmm, I think there's a limit like that here now (not in 2013 when I bought the car, AFAIK), but I think the limit is higher? Maybe not, I'm not sure.

Also illegal in many euro countries. Which country was this in?

His username is likely a big hint there...

Greece. Would you trust our banks with your money? :P

But for such things the Germans invented the 500 euro bill.

Eh, is this legal? Which EU country is that?

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.

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.)

> 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.

If cost of debt < investment returns -> 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).

To be fair, I think the equation doesn't get that much more complicated, typically. Add in fees and you go a long way to showing why this won't work. Add in a floor function for operating expenses money you need on hand, and you show most of the rest.

>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.

Anyone willing to give me a loan for $10m at 2% -- I'm game.

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..

tell that to the people that own certain porsches. some of those 911's go up in value

You can't get unsecured credit that cheap for very long or in great quantities.

And when people do shit like that with home equity loans, etc, everything works great until it doesn't.

More strictly: (investment returns - tax payable)

(unless your debt is tax deductible ... most car loans aren't)

If it's a company car it is.

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