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.