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Comment by CraigJPerry | Hacker News Reader

>> That's why you see so many expensive cars driven by people who can't afford them

How is it possible to keep possession of the car if you’re not paying the contractual obligation? Is there some exception for cars?

For example, failing to keep up with mortgage payments will eventually see you lose the property.

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OP meant "can't afford them" in the sense of "couldn't afford the full price of". There are lots of people here in the UK on medium incomes driving around in £80,000 cars using this finance

Can confirm. Financial literacy is fairly thin on the ground here.

How do the economics work out for the seller? Depreciation is highest at the beginning, when these people are paying the per month price. If they can't afford a loan for the price of the car, how are they making a lease payment that covers the depreciation for the leasor? I'm sure there's a reason but I can't think of it.

I don't think you understand how car loans work?

Let's say a car costs $50,000 and Joe wants to finance it (because he either doesn't have $50,000 or just doesn't want to spend $50,000 right now), so he gets a $50,000 loan to buy it. Let's also say the loan will mature in 10 years, also obviously the loan has interest but we don't need a specific number for this conversation.

The minimum payment per month will be set such that Joe will pay off the loan in 10 years, and Joe presumably can afford the loan's minimum monthly payments since he accepted it to buy that new car.

If Joe wants to pay off the loan sooner and he can afford it, he can just pay more than the minimum due during a given month.

So Joe gets a loan from a bank (oftentimes middleman'd by the dealership), the bank pays the dealer in full, Joe gets his car, the bank becomes the lienholder on the car until the loan is paid off.

Thanks! Indeed I've always paid cash for any new cars I've bought. But I still don't see how companies that provide leases are able to purchase a car, lease it out for cheaper than the cost of a loan to people who couldn't afford the loan, and still make money despite the depreciation?

Imagine a car that costs 50,000 - a 10 year loan will be 500 or so per month according to https://www.calculator.net/auto-loan-calculator.html.

If I want to buy a car and lease it out to make money, but charge half that much so people who can't afford it can still get it, then let's say I charge 250/month. It would take 17 years of leasing it at the rate that it was worth when it was new in order to just break even and get my outlay on the car back.

So it's possible that I'm missing something else key about how car loans work but the numbers don't seem to add up for the leasor that your market is people who can't afford a car loan. Even https://www.bankrate.com/loans/auto-loans/lease-vs-buy-calcu... seems to indicate that you pay a little less for the loan than leasing, so I'm still not getting how leasing is the budget option that helps people get a car they can't otherwise afford a loan for.

EDIT: the answer is here: https://www.thecarexpert.co.uk/car-finance-pcp-explained/. Apparently in the UK, leases work with a small monthly payment, but at the end of the lease term there's a gigantic balloon payment where you pay back the difference between your cheap payments until then and what you actually would have owed if you had a normal lease or loan the whole time - thus making the leasor whole. The system is designed such that the leasor will always have received the cost of depreciation (plus more) at any point in the term.

Answering from a US point of view... Generally, the total cost of leasing a car is going to be more than the total cost to buy a car on a loan and resell the car in the same time period. In a perfect market, I think the difference in the total cost of loan versus lease is essentially the value of transferring risk from the consumer to the lessor as to whether the car retains its anticipated residual value at the end of the term.

With a loan, the buyer pays off the principal and interest and absorbs any discrepancy between the resale value and the remaining debt. With a lease, the lessor absorbs the discrepancy as long as the consumer meets the other stipulations of the lease, such as mileage limits and maintenance. The lessor acts almost like an insurer to charge fees and absorb this risk across a whole fleet of cars.

Are cars ridiculously overpriced in the UK? GBP 80000 is USD 101000 right now, which is basically high-end sports cars or a Mercedes S class or BMW 7 series. I’m a very high earner and have never paid USD 70000 for a car.

Not to be too pedantic about it but that’s not what “can’t afford them” means.

I think what parent is saying is people lease or finance cars so they can drive cars they wouldn't be able to afford in full. That is, those people can afford the monthly payments but cannot afford paying the sticker price.

An easier to understand example would be how most people finance iPhones with their carrier. Most people balk at paying one or two grand for a phone, but don't mind paying ~$50 per month. At the end of the loan when they pay off the balance, or maybe even before that if the carrier offers, they upgrade to the next new iPhone.

Which also seems a bit wild to me.

I won’t buy a new phone let alone a new car.

I only new because buying new means I do not have to worry about its history, it comes with manufacturer warranty.

Buying used is rolling the dice on whether I end up with a Hangar Queen demanding attention I don't want to give.

Time is money, as the saying goes. Buying new is more expensive, but it's cheaper in the long run with the time and money I did not have to waste on unexpected upkeep.

>Buying new is more expensive, but it's cheaper in the long run with the time and money I did not have to waste on unexpected upkeep.

It depends. We tend to buy three year old cars and on the whole they have all the niggles resolved by then. After that they don't start having problems until at least 100,000 miles. So we pay half the price for no extra aggravation.

Doesn’t need to be need for manufacturer warranty.

My certified preowned car actually came with slightly more miles and a slightly longer manufacturer warranty than a new model would have.

There is lot of models one here in different country could be:

Down payment x000

Monthly payment for x months x00

And then final payment xx000 after x months. But the seller has calculated it as such that they can buy it back and get the more by selling it.

So in the end "buyer" only pays for the depreciation and interest, which were low in previously. Much harder model now that cost of loaning has gone up. Quite a lot of people can afford to pay hundreds a month, even if that really doesn't make long term sense...

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