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Comment by rootsudo | Hacker News Reader

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.

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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.

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.

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.

Healthcare. If you ended up paying from pocket.

>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.

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.

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?

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

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.

>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

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

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