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Comment by tanderson92 | Hacker News Reader

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.

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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.

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