This goes for many things outside of cars. Insurances, Mortgates, student debt, lottery tickets, consumer debt, credit cards and so on.
In general people are sitting ducks when it comes to being fleeced by parties with a plan.
I always wonder why schools don't even teach the beginnings of finance to everybody. You'd almost think there is a reason why it explicitly is not being taught.
They want to flip houses for massive gains in short periods.
The facilitators aren't fleecing them as much as just meeting their needs. Anyone who tells you that you can't afford that car or that home prices won't appreciate to the sky tomorrow isn't going to get your business.
And my school and my kids school teaches basic finance. No one ever remembers it because most kids aren't interested in it.
I feel like the difference between "needs" and "wants" is an elementary distinction we make on a day-to-day basis. But when we're talking about firms and economics, the distinction does not exist except as labels for the amount of elasticity in demand something has.
> I always wonder why schools don't even teach the beginnings of finance to everybody. You'd almost think there is a reason why it explicitly is not being taught.
This! It's crazy the advantage you get from knowing some basic personal finance and economics. Whenever someone younger asks for advice about what to learn to get ahead my two answers are personal finance and programming.
Maybe I didn't understand the deal I bought a car with, or maybe it's an unusual deal, but I'm happy with it.
My car costs me a set amount per month that I can afford, an amount that is actually equal to the monthly depreciation it would face anyway (on average) over a three year period (including the initial low value deposit I paid, this is still true).
Even if I bought it outright, which I couldn't afford to do, I'd 'lose' the same amount of money _in total_ thanks to that depreciation. Effectively I'm 'renting' the car for the same 'cost' as owning it, just without the upfront payment.
Further, GAP insurance purchased at a one off price of about £100 (which was far more tricky to make sure I got the correct thing) will cover any difference in the 'hand back' price at the end of my term and the value of the final payment. So basically if the car does depreciate below the value of the final payment then the GAP insurance will make up the difference. Likewise if I have an accident etc.
I reject the idea that PCP deals are like 'buying and selling a series of homes using interest-only mortgages'. Cars lose value, always. Whether you buy it outright or not, it'll depreciate in value (save for some hyper rare beasts you aren't going to be buying on PCP anyway). But the article doesn't address this point at all as far as I can see and it's an important part of the value proposition of using these types of deal.
My understanding is GAP insurance only comes into play if the car is written off (and makes up the difference between what the car was worth and what the insurer pays out). I didn't think it was designed to cover any shortfall in the hand back price?
This is the way I've seen it too. It may not be everywhere now, but it was meant to be a safety net in the event that a car was totaled and you still owed the finance company money. For the finance companies, this was essentially free money. Of course they ran loss statistics on it to make sure that it was in their favor, but I did see it save people from a really bad situation. My coworker, driving to work one day got hit and totaled his car. He actually got his car loan at the company we worked for before he started working there. They just wrote off the car, and he was able to go and get a new 0% interest loan. Total win for him. This is the exception not the norm though.
You're not just paying the depreciation, you're basically getting a loan for the (depreciation value + profit). And the average interest rate on that loan is 14% APR. This interest rate doesn't have to be disclosed to you though, because it's not "technically" a loan. There's a reason why auto dealers advertise leasing so much, it's the most profitable business for them. Leasing is the most expensive way possible to drive a car.
I agree. I helped my younger sister buy a car on a PCP recently, and I think they are actually a reasonable deal.
It is my understanding that finance company guarantees the future value (GMFV) and that the final payment is optional, e.g. you can always hand the car back at the end of the term if it is worth less the the balloon payment.
That final payment combined with the trade-in value is structure such that the dealer is the only party that will give you a good price on the vehicle and you'll get a new car instead of buying out the old one.
I'd noticed that everyone seemed to be spending more on cars than I felt was wise. After discussing it with a friend with one of these deals he said he basically felt trapped into buying a new car after 3 years.
Yes. The deal is dandy if you plan to buy every 3 anyway. If you don't, that is the big downside. (Or if you want to drive a lot of miles, etc). Buying a car every 10 years is a lot more fun than every 3..
People are buying cars they can't really afford because the monthly payments seem to be affordable. I think they know it's an expensive way to have a nice car but the alternative (because they don't have the capital) may be buying an old banger or having no car at all.
The article seems to be talking about short term (2-3 year) interest-only leases.
There's a middle ground your comment hasn't mentioned. Instead of leasing or buying a used car, consumers can finance a new car (e.g. 5 year loan). It requires slightly higher monthly payments to cover the principal, and you can't switch cars as frequently, but you have ownership of the car (and freedom from payments) after the loan ends.
I tend to think that buying used is a much better value, especially in areas that don't regularly salt their roads. But it's good to know about all available options.
But the main reason people get short term leases is so that they can switch cars often and drive a new car all the time. They don't want to deal with selling a car, fixing it, worrying about it losing value after accident, with short term lease you pay a premium for an option to drive a new car and less worry about things
> Instead of leasing or buying a used car, consumers can finance a new car (e.g. 5 year loan). It requires slightly higher monthly payments to cover the principal, and you can't switch cars as frequently, but you have ownership of the car (and freedom from payments) after the loan ends.
Yes, and it's important to know that hire-purchase has existed in the UK for years as a method to buy cars, and this new product hasn't, and there's some confusion from the public about the type of product they're buying.
I guess the idea is that salt wears more on the car and as such the leasing option would be better since the second-hand value is guaranteed.
However I think car finance companies are clever enough to include this in their calculations and the second-hand value you get for a car in France is not the same as in Sweden where roads are commonly salted.
I'm not familiar with this particular structure, but it sounds like the sequence of cash flows are:
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?
The traditional way of financing a car purchase in the UK is a hire purchase agreement where a large deposit (usually half the value of the car) is paid upfront. This can be cash but is often covered by the part exchange value of the customer's existing car.
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.
The US industry has always been on the forefront of trying to convince people that they can afford stuff they actually can't and came up with a lot of creative ways to do this. The best example of course is the recent housing crisis.
I'd say europeans in general are more debt and risk averse, this even shows in the lack of credit card adoption in places like germany.
> I'd say europeans in general are more debt and risk averse, this even shows in the lack of credit card adoption in places like germany.
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.
While i agree, not sure about 1) Germans use debit cards everywhere, it's just that credit cards are used very rarely but also accepted very rarely which is probably due to some fees that make it not worthwhile, while in the US you cna pay für $3 coffee with a credit card.
UK absolutely has car leases, probably half of my friends are on proper car leases where they don't own the car at the end and they don't have any equity in it.
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.
At least in Sweden (and I imagine the UK is somewhat similar) leasing for private citizens have only just started taking off. It's been available for companies for some time but I imagine that the low interest rates has made it viable for individuals as well.
Another notable difference is that the car companies take all the risk when it comes to the second hand value. If more and more new cars are sold with similar contract lengths (Which is true in Sweden at least) that will cause a decline in the second hand value. Sounds like a familiar situation but with cars instead of houses
>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.
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.
> 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.
In the U.K. this isn't really possible with car leases. If your company owns the lease, then you need to pay taxes for any personal use (personal 'benefit-in-kind' taxes, and the business can't reclaim VAT). If you personally own the lease, the only thing you can claim is mileage for business use - but this is the same as owning a vehicle outright.
I was under the impression that the whole point of auto-financing was to get even even more money out of the consumer. When I bought my last car, I just bought it outright (because it wasn't particularly expensive) which appeared to baffle the dealership. I was actually a little concerned that the dealership told me it was the largest check they'd ever seen (for ~$14k).
Getting people to sign off on a contract they don't really understand is a great way to get more money out of the consumer than they'd otherwise spend.
That's because their deal was hedging on the additional commission they'd gain from financing. It's rather screwy. Whenever I trade in a car I always negotiate price on the car alone first, then get a trade appraisal (usually have one in hand from Carmax prior) and if they start playing games I walk out. Past two cars, I walked out and got a call within an hour saying come back we'll do the deal.
I did similar with our last Honda. Came to the end and I asked if they would want me to sign an arbitration agreement.
Told them I would, but not for free. A lot of people died for my right to sue them in court. I asked for and received an accessory they sell for $180...
Thank you for that... but I think you sold your rights too cheaply. I walked away for the right to cross out the entire arbitration clause. They were mystified that I would even read the stuff on the back of the contract, let alone have a concern with it. They were offering me thousands of dollars off, but wouldn't budge on the clause.
I went to another dealer the next week that hadn't yet added that toxic language to their contracts.
I just consider myself fortunate that I still had the option of going with another dealer. I don't think it is possible to find a bank, phone, or internet provider without an MBA clause.
Basically know precisely what you want and do your homework to find what the common discount is, and push it just a little bit. The main point is to be an easy customer.
It wasn't anything like this when I went shopping for a car at Audi and MB last year.
I was expecting some discount for paying cash since the interest rates were all less than 2% (which barely covers inflation). However they were completely indifferent to whether I paid cash or financed so I financed.
Is buying a new car with cash really that weird? Not to mention that he could have obtained the money elsewhere at a lower rate(say a 5% loan from a bank vs 8% on dealer organised finance) - in which case as far as the dealer is concerned,he's paying in cash from his own account.
Call me old fashion, but I think car salesmen ought to make their money off of selling cars instead of exploiting consumer's ignorance of financial tools and more complex math. This is so much more nefarious.
Guy walks into a car dealership. He's dressed well. But the salesman is bored, he doesn't care. Idly, the salesman asks,
"Hello there. So, what kind of car have you been thinking about." He doesn't care.
"Oh no, I'm not here for a car. I was wondering if you had any derivative contracts that bundled those sweet financing contracts you've been floating."
Salesman bolts upright, and goes shifty eyed - looks around to see if anyone heard. He goes to the front of the office and locks the door. Now he's all ears.
Car dealers used to profit from people's emotions and ignorance about the product. That's a reasonable exploitation of ignorance because car buyers should know about the car they're buying.
Today, car dealers sell consumers to banks using cars as bait people. Exploiting people's ignorance of dense financial/legal contracts seems extremely abusive to me.
When I've bought mortgages, I was required by law to sign a document that says "I have read and understood these loan documents." I've seen many people in the newspaper complaining that they neither read nor understood the terms.
At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?
>At what point do you expect legally competent adults to pay attention to and take responsibility for what they're doing?
At no point. I don't even consider it a matter of "responsibility". You can only take responsibility when things are clearly laid out. But what about the even more important responsibility to CLEARLY lay things out that should fall into businesses?
What I do expect and find important, and should be legally binding, is that no business should be allowed to hide the actual impact of purchases behind legalese and long-winded "financial product" descriptions, and then put the blame on the customer for not "reading through it".
At the very least, they should be explicitly, and in common, everyday language, give something like: "The average buyer that used this financing option ended up paying X% above the base price".
"At the very least, they should be explicitly, and in common, everyday language, give something like: "The average buyer that used this financing option ended up paying X% above the base price".
"
All this does is increase the number of documents.
Seriously. How do you think it got to be so many documents, where half are disclaimers and "plain english" warnings/etc for the consumer.
They usually don't hide the actual impact.
In the three states i've bought houses, there is at least one page in the set that literally says "you are taking out a loan for $x
your interest rate is x%
after 30 years, you will have paid $x for this loan"
Similar things happen for auto financing.
What more do you want?
Also note that no amount of plain english is going to make complicated things both simple to understand and correct in all the details. That's in fact, exactly why they are complicated. Most loan documents are pretty plain english these days, so it's usually not overuse of legalese either.
(plus, what makes it easy for you to understand may not be the same as for others).
One does not get to say it's everyone else's job to make you competent.
If you go and implement PaxOS and screw it up, you are welcome to try to blame Lamport for writing impenetrable papers, but most people are going to blame you for not making yourself competent.
You defend the leeching practices of financiers by the claim that the law already demands obvious hints in contracts, but consequently pretend that there was no obligation to educate. This is a contradiction.
> but most people are going to blame you for not making yourself competent
Shouldn't it go both ways? Businesses might be confident with your assertion and might rely on it to do business. But blame is the wrong attitude if you go in holding that opinion it's fraud. If you let someone sign a contract although you are sure they didn't read it, that's fraud. Simple as that. Why do I get weird looks when I actually start reading a contract I am about to sign?
"You defend the leeching practices of financiers by the claim that the law already demands obvious hints in contracts, but consequently pretend that there was no obligation to educate. This is a contradiction.
"
As i mentioned elsewhere, the vast majority of states very explicitly require education as well!
". If you let someone sign a contract although you are sure they didn't read it, that's fraud.'
Actually, it's not by any definition of fraud.
You have not intentionally deceived anyone of anything.
It would only be fraud if you intentionally told them the wrong thing, or deliberately tried to get them to not read it, or something more than "knowing this person has not educated themselves". We don't have a lot of thoughtcrimes.
It may be a void contract, but it's definitely not fraud!
" Why do I get weird looks when I actually start reading a contract I am about to sign?"
I don't, so i'm not sure.
In fact, in any real estate transaction i've ever been a part of, if i say "hey, do you mind if i take a few minutes to read this page more closely and ask you some questions about it", the answer i get is not "rolled eyes", it's "absolutely, that's what i'm here for"
I got what you said.
Apparently you missed mine, so let me try again, hopefully a little more clearly :)
You say the point is:
"That information should be displayed (by law) with prominent letters as big as the base price, under any sign/ad/etc which shows the latter."
I'm saying: It already is
Along with everything elseother people considered to be just as important to make sure everyone knew.
:)
IE The thing you want, has already happened.
You cannot find it, because not everyone agreed with you about what is the most important, so now you have 50 pages of the base price and the other important thing in big letters.
How can a person making an ad know how long a buyer's loan term will be or what interest rate they will qualify for? How would you know the value of any potential trade ins?
Things like the interest rate you qualify for are unique to the buyer. How can a print ad in the newspaper know the interest rate the buyer will qualify for? How can a print ad in a newspaper know what the purchaser of a car is going to trade in? There's not even a customer yet.
That was what my car loan paperwork did. It had a table with the negotiated price, the APR, the interest over the term of the loan, and the total price.
I expect this is legally mandated, and the question I have is which states are preferring to let the dealers prey on people?
This looks like people fumbling cryptocoin purchases (or getting them lost for some reason or another) and people answering with "ah you should have known better and done the right way"
And in any transaction I put the first blame in the person which had the more information in advance. It's their duty to inform the other, especially if they are the one's receiving the money.
Taleb has written something close to that recently:
I worked once for a classic U.S. investment bank of the prestigious variety, called “white shoe” because the partners were members of hard-to-join golf clubs where they played the game wearing white footwear. As with all such firms, an image of ethics and professionalism was cultivated. But the job of the salespeople (actually, salesmen) on days when they wore black shoes was to “unload” inventory with which traders were “stuffed”, that is, securities they had in plethora in their books and needed to get rid of them to lower their risk. (...) Salesmen hawked how a given security will be perfect for the client’s portfolio, how they were certain it would rise in price and how the client would suffer great regret if he missed “such an opportunity”, that type of discourse. Salespeople were experts in the art of psychological manipulation, making the client trade, often against his own interest, while being happy about it and loving them and their company. One of the top salesman of the firm, a man of huge charisma who came to work in a chauffeured Rolls Royce, was once asked whether customers didn’t get upset when they got the short end of the stick. “A customer is born every day” was his answer.
Which brings us to the notion of asymmetry, the core concept behind skin in the game. The question becomes: to what extent can people in a transaction have an informational differential between them? The ancient Mediterranean and, to some extent the modern world, seems to be converging to Antipater’s position. While we have “buyer beware” (caveat emptor) in the Anglo-Saxon West, the idea is rather new, and never general, often mitigated by lemon laws. So to the question voiced by Cicero of a debate between the two ancient stoics, “If a man knowingly offers for sale wine that is spoiling, ought he to tell his customers?” , the world is getting closer to Diogenes position of transparency, not necessarily via regulations as much as thanks to tort laws, one’s ability to sue for harm in the event the seller deceived him.
> What I do expect and find important, and should be legally binding, is that no business should be allowed to hide the actual impact of purchases behind legalese and long-winded "financial product" descriptions, and then put the blame on the customer for not "reading through it".
And in general, as I pointed out here, such contracts tend to be invalid in court. However, signing a piece of paper in plain english certifying saying "I read it" when one did not ought to mean something.
A legal doctrine where one can not bother reading contracts and yet get them decided in favor of ones imaginary terms doesn't sound like a workable system. The whole point of written contracts is so there's a record of what the terms were and what was agreed upon.
> A legal doctrine where one can not bother reading contracts and yet get them decided in favor of ones imaginary terms doesn't sound like a workable system.
Having to agree to dozens of pages of contract every day just to do seemingly ordinary things like using websites or ordering stuff online doesn't sound like a workable system either.
When they pass the bar exam. It's easy to think you understand a contract, but you don't.
Unfortunately clear language isn't litigated. The vague and obtuse language has a legal meaning, because it has gone to court. So that's what contracts are forced to use.
Exploiting ignorance is legally fair game, that doesn't make it ethical. At this point dealers are basically just selling consumers to banks.
I would blame the consumers if they could take their contracts home, consult with family, financial experts, etc. But, have you ever been in a sales room? Most people are pressured to sign ASAP and dealers generally refuse to print out contracts until after they're signed.
Not in the UK. A contract has to both be fair and understood in order for it to be valid. The thing is, given all the finance agreements I've had in the UK tell me what the total cost will be ( generally over double the cost of the product ) I'm not really sure these products aren't to be reasonbly understood and it woukd seem like laziness or greed eould be the biggest driver.
The exception to the rule here would be payday loans which have some horrible outcomes shouls you fail to pay them back on the agreed date. These were being legislated for the last I heard, so I'm not sure if they still exist.
The other game in the UK is targeting the poor with silly rates of interest in the knowledge that many of them simply won't pay. Technically they're high risk loans and thus somewhat valid but there is an argument that the likes of brighthouse shouldn't exist and that people without jobs shouldn't really be given finance to buy a tv at over double the retail cost.
> Most people are pressured to sign ASAP and dealers generally refuse to print out contracts until after they're signed.
I refuse to sign until I see a printed copy. Just remember that the dealers want that sale a lot more than you do. If they aren't being reasonable, get up and walk away. They'll change their tune very quickly.
No non-lawyer is competent to understand all real estate transaction documents. But they might be competent enough to acquiesce to the grand stupidity of our culture [1] and hire a real estate attorney. Mine reviewed all the relevant documents and come to the closing, for a flat fee that I thought was rather reasonable, in particular compared to the hand cramp I got from all the ridiculous paper work I had to hand sign.
[1] Consider: the banks, the title company, the county, all want hand signed documents. But we accept computerized voting machines to manage elections.
> No non-lawyer is competent to understand all real estate transaction documents.
I understood them well enough. It isn't that hard. The misunderstandings people would complain about were not about subtleties or legal hare-splitting. It's also established legal doctrine that a contract written in ambiguous, confusing, or tricky language isn't going to hold up in court. Judges take a dim view of that.
I also actually read them. Amazing. Although this would visibly annoy the escrow officer.
You did the right thing by having a lawyer review it if you didn't feel confident about it. There's no excuse not to if it is a large transaction.
A house is, for most people, a very large transaction. Saying "it isn't that hard" considering attorney's specialize in real estate is like saying "reading x-rays isn't that hard".
Had I not had an attorney present, it would have taken me all day, instead of 4 hours of reading stuff. It wasn't a matter of confidence in myself, it was a matter of having less than 100% trust in everyone else present.
" Saying "it isn't that hard" considering attorney's specialize in real estate"
Attorneys specialize in everything, the fact that attorneys specialize in real estate does not make every real estate transaction difficult, or require an attorney.
There are attorneys who specialize in speeding tickets. That does not make understanding the laws around speed limits difficult. If just means it's an area where attorneys believe they can make money by building a niche. That is not a measure of the complexity of that area, but of a large number of factors. (same with DUI)
In fact, attorneys specialize in real estate to handle the complicated things, which are not closings.
So your point kind of goes against this argument you keep trying to make.
I'm also not at all sure what your analogy to x-rays is supposed to be proving. It seems very strange
x-rays have no context and to people not familiar with at least anatomy and a number of other things, and are subject to different opinions.
On the contrary, real estate contracts, which are usually boilerplate plain english, only require understanding english. They may take a while to read, but they don't require specialized training. They are generally not subject to different interpretations, that's precisely why they are written the way they are!
There is no equivalent for x-rays that could make laypeople competent.
I should add that it isn't hard for ordinary real estate transactions, as the contracts are pretty standard boilerplate. If there's anything unusual about it, such as easements, water rights, unclear borders, weird covenants, by all means get a lawyer involves. If you're at all uncomfortable or confused by the deal, get a lawyer. Don't wing it and then blame the other party.
If you're buying an $800,000 house, often the most important investment in a person's life, spending a day reviewing the deal is a trivial incremental investment.
"No non-lawyer is competent to understand all real estate transaction documents."
This is bullshit, they are not complicated legalese.
Additionally, the vast majority of states require someone who can explain the documents to you be there at the closing.
Some require they even be lawyers.
Even those that don't, have provision on what must happen.
For example, in California, whoever is doing the closing will stop on each document, explain what the document is and what it says, and ask you if you have any questions, before proceeding to the next one.
I don't believe, when that happens, one can reasonably complain they didn't have a chance to understand the documents.
Look up the names Schwartz and Aurenheimer. They either ignored the click through EULA or deliberately broke it. Charged with CFAA felonies over it. One got prison for many years. The other killed himself to avoid it as well as to protest the insanity of having criminal charges brought against them because they broke the EULA terms on a web site. Both used scripts to cycle through ID numbers in a web page. This is what happens when you don't read. The system is fucked. Better make sure you aren't violating the TOS on any of the web sites you visit.
Schwartz knew he was doing something legally wrong, because he hid in a closet to do it. (The charges against him were also grossly excessive.)
I don't think these cases support your notion that EULAs were the issue. Nor do I think these extreme cases are cause for EULA concern for someone using software as it was obviously and reasonably intended to be used. Disclaimer: IANAL, and if you want real legal advice, go ask a real lawyer. Taking legal advice from the internet is foolish.
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.
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.
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.
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.
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.
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.
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.
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?
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.
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.
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.
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.
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.
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.
>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.
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.
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.
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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.
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 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.
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?
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.
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.
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.
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.
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.
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 ;)
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.)
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).
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..
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.
That's absolutely true. There are three main ways the dealer can make money on a deal. They are; New car price, Trade in value, and Financing terms. As a consumer you should always negotiate each of those items separately. What dealers like to do is move their profit between the three to make it look like they are negotiating when all they are doing is moving the bottom line costs from one line item to another.
So for example they might quote you a price on the car that they know is below average asking price from dealers in the area and give you a typical good interest rate on the loan but then way low ball you on your trade-in.
To avoid getting a bad deal I always do the following before setting foot on the dealers lot.
1. Go to CarMax or similar place ahead of time and get a quote for how much they would buy your car for.
2. Be ready to pay for the car in cash or have a loan pre-approval lined up from a secondary source for financing outside of the dealership.
3. Know what the car you are looking at sells for in your area.
4. If you are buying a new car, shop towards the end of the month. Manufacturers offer incentives to dealers based on the number of cars they sell per month. So say a dealer needs to sell 50 cars a month to get the incentives which are $500 bucks per car. If they are at 48 cars sold with two days left to go in the month they are a lot more likely to sell you a car at a lower price and get to 50 so they don't lose out on the incentive payments for the 48 cars they have already sold.
Once you are at the dealer make sure you negotiate each of the 3 parts of the deal separately. First agree on the price of the car. Then entertain their offer of a loan and for your trade-in if they are as good as or better than the alternatives take them other wise turn them down.
had a similar thing happen a few years ago when buying out my car at the end of a lease (normally a bad idea, but worked out due to specific circumstance). The person I was dealing with was baffled, kept wanting to have me fill out a loan app. He either didn't want to or couldn't understand what was going on.
At the end of it I told them I had the certified check as previously agreed for the full amount due on the vehicle, handed it to him and told them I was walking out the door in 10 minutes and they could call the police and report it stolen if they wanted to. It was unexpectedly difficult to close up a seemingly simple transaction with pre-agreed upon terms.
I tried to buy a Mazda car outright. I was told that it would be 2000 dollars more expensive unless I finance.
I then asked if I can get the loan and immediately pay it off, and the dealership became sad. Apparently, Mazda financing gives them the 2000 dollars, but if the customer pays off the loan in less than 6 months, the dealership losses the money (on other states, they'd probably have an early repayment fee on the loan, but that's illegal in California).
So, I took the loan, paid off all but a thousand dollars, and now feel silly paying off the remainder over 6 months.
Similar experience. With a recent car purchase, the dealer's management was ready to let me walk at the end, even though the price was posted on the internet and verbally reconfirmed. This was simply because I "revealed" that I would not be financing it. Worse came to worse, and with the tacit consent of the salesperson himself I ended up financing it - maxing out the amount I could put on an AmEx in order to bank reward points, and paying off both the AmEx and the entire loan balance as soon as I received my first payment notice.
As it turns out, they receive a kickback from their financing partners if the loan is held >= 90 days. So, in the end, I got the car I wanted at the price I wanted, plus some cash back from AmEx, and minus a whole bunch of wasted time by everyone involved.
I recently did the same (albeit for $10k). Even after agreeing on everything, they kept asking "are you sure you don't want to finance just part of it? We can give you a really good rate!"
All I could do was patiently ask them "why would I do this? Is it not still more of a cost to me, even if a small one?" They acted really confused and upset but I understood that this was simply a sales tactic to make me feel as if I was making some sort of mistake by not paying some small amount of interest in addition to the cost of the car.
I eventually got a bit irritated as it was making things take a lot longer than they needed to. I just told them, "look, we already negotiated a price and I have the check written out right here. I have no need to finance a $10k car right now and I would like to just finish the sale."
They weren't quite as friendly after that but hey...it's an adversarial relationship and I'd been perfectly cordial up until that point. I was already paying $10k for a car they likely got for half as much as a trade-in anyway.
You have it backwards. Buyers demanded the ability to buy homes they couldn't afford, the government required Fannie Mae, Freddie Mac and banks to finance them and the US Government guaranteed some of the loans.
The buyer behavior was rational, at least on the surface, because homes almost always appreciate over long periods and were appreciating like crazy during the bubble. We are pattern matching monkeys, all of us, and it's only the few who can see the bigger picture during those times.
Many didn't want to miss out on the big payday buying $300k homes and flipping them for $500k a few years later. All bubbles accelerate bad decisions/behavior and it's really difficult (if not impossible) to legislate incentive driven behavior away. It's obviously possible to not legislate bad market incentives, but we flunked that one to.
Your wrong, people with money were looking for "safe" places to park their money and make interest. Savings accounts suck, thus all these financial products were born.
Saving some accounts don't suck, they are excellent at what they do. Which is providing a very secure place for your money that is quickly accessible and even pays a small amount of interest.
There's obviously higher return investments, but they provide those returns by taking more risk, and more variance.
This is an interesting spin, in that it absolves a mortgage industry which did everything short of drag people in off the street and hold guns to their heads to try to issue more loans. Omitting that, when a major source of the massive drive to issue loans was the popularity of mortgage-backed securities as an investment vehicle and the incredible demand for such securities, is... well, it does make one question your understanding of the problem, or if you do understand it perhaps the motives behind your choice of framing.
> Nobody was made to buy a home they couldn't afford. They wanted it
I suppose, in the same way that no one forces me to buy drinking water, I just want it, so as not to die.
If there is no affordable housing available (as is the case in most US markets today), you essentially are made to buy/rent an unaffordable home if at all possible. Because the alternative is homelessness, which isn't really an alternative.
Obviously, sometimes people purposely overspend on housing because of lifestyle inflation. But I don't think that's a majority -- many people are overspending on housing because housing is a fundamental human need and they have literally zero alternatives to overspending. It's more common than most people will admit.
There's plenty of affordable housing around, it's just not in places people want to live. Some markets require you to shell out 50% of your income on housing, but it's not like people have no choice. They do it because overall it's worth it to them. If they didn't, there wouldn't be enough takers.
The difference here is that many of the people caught in the mortgage crisis could afford homes, they just couldn't afford the really nice homes that they bought. People who's finances would reasonably put them in a $250,000 home were instead buying $750,000 homes on the idea that the price would only go up and the loans were cheap.
Look nobody makes you buy anything. But RE is different in that the market isn't completely rational. Your options are rent, own, or sleep in your car. When I was out visiting a town in the Midwest you couldn't rent. There were no houses for rent. Even if a developer started a multi unit rental right now it would still be 6-9 months until it was rentable.
You're right. I rather meant to say "people were manipulated into buying...". It's always the same, people don't understand because they lack education and some rich guy will take advantage of that. The movie "The Big Short" [0] sums it all up very well.
No one was manipulated. Everyone was greedy. They read the news, they knew what the houses down the street sold for a few years before. They all thought they'd get rich flipping houses.
Loan officers just facilitated what their customers already wanted.
You have missed an important point. Those loan officers were paid a fee for the service and their institution sold off the loans that were derivatized. The patsy was down the line. They all got paid...
Go back and review the news that came out. "The Big Short" is a decent summary. The trading manager at Bear Stearns who bought the derivatives got to walk out and keep his big bonuses. The share holders ate it. The rating institutions were complicit too - they knew the products were crap but knew the customers (lending institutions) would go to another one and so wrote the bogus ratings. See the players in the game got paid. The snooks got screwed.
Bill Black, who prosecuted the Savings and Loan Crisis, and sent many fraudsters to jail reviewed the 2008 crash and was incensed at the lack of prosecution.
The consumers saw what they wanted to see. Very few consumers perfomed due diligence. The old proverb tends to be true: "If something seens to be too good to be true... It probably is." Fraudsters have taken advantage of the gullible throughout human history. Our generation has no excuse: we have unparalleled access to information and most are too lazy to put the effort in to check these things out our to hire competent counsel who work for us not the seller. How many parents and students understand the debt they take on for college and the expected ROI???
i understand how collateralization works, i used to invest in tranches. You are confusing the fact that MBS buyers didn't do their homework, with the fact that home buyers were greedy specifically because MBS financing enabled them to be.
I'm surprised that you say that while referencing The Big Short because I thought it made it pretty clear that the people selling houses lacked education as well. There was the whole thing where the guy sees dudebros selling houses to strippers and was all "oh no its all true". I think one of the dudebros even said something like "I was working at the car wash two years ago and now I have a boat". Everyone else not knowing what was going on was the uniting theme of the main characters.
Your absolutely right, but the loan issuers were facilitating people coming to those decisions. I remember when my wife and I bought our house just before the bottom fell out. The loan officer couldn't believe we were only getting pre-approved for a mortgage that was a maximum of 10% of our gross income. She tried (somewhat) to upsell our Max loan balance, but we stood firm.
Car loans are actually getting featured on Bloomberg for having similar risk last month.
Though there were assurances that the same thing wouldn't happen since loan issuers were reining themselves in, that cars were far more liquid than a house, and easier to seize on a failed loan. Of course if it's already in the news, it's too late to act.
Car loans also aren't federally insured and guaranteed, and unlike the housing bubble, the federal government isn't pressuring car loan companies to make shaky loans to bad credit risk customers. This is almost entirely a free market, and so it's bubble will be smaller and the consequences will be visited almost exclusively to those who made the bad loans.
Getting even more money out of the consumer doesn't need to be a shady thing. Lots of people simply don't have the money to buy a car outright. Or enough to purchase on traditional loan terms.
Almost no one pays cash for a car anymore and the industry knows this. Many dealerships make more money (or at least they did, but I'm sure they still do) from getting people to get a loan from one of their "partners" (auto-loan companies which accept their paper). It's been years since I worked for an auto-finance company (my soul still feels a little dirty), but I know it wasn't uncommon for dealerships to get an additional 1-2% from the loan. This gets complicated as far as how much they earn per car, because there were also penalties for loans they sold that defaulted before a certain point etc. In the end it worked out in their favor though hence why they kept using certain loan places. This is why you hear people tell you always negotiate the price of the car before you tell them you have your own financing (either cash or through your bank), because they'll drop the price a little more knowing they will make it back. Don't ever think they're working to get you the best deal possible either, they'll either give you the first response they get back, or the one that nets them the most money if multiple ones come back at the same time. The faster they get you to sign, the faster they get paid.
(I also really hate to say this, but if you're female and don't like confrontation, bring a male friend and act like he's the one buying the car. It's a male dominated industry that is very sexist. If you're a strong person and can handle it by all means go for it, but expect them to be pushy and talk down to you. I'm a white male, and I hate dealing with a lot of them. I can't imagine, although I've heard the stories, of what it's like not being in the privileged class.)
The real truth is that to the dealership, this additional money doesn't really matter in the big picture. They make almost no money from selling cars. You ever notice how all the dealerships have a service department? That's not by coincidence. It used to be (and probably is still close) that 90% of all revenue from a dealership is on service. Getting money from warranties; getting money from people who only trust where they bought it etc. They want to sell the car, so they can get the maintenance. They won't sell for a loss, and they'll take you for what they can, but really they're in it for you as the long term support. Also, the car salesperson has no real influence over the price you get. That comes from the general manager behind the desk. (A long time ago this didn't used to be true, but dealerships wised up that you don't trust people on commission making decisions. It's quite possible the sales people don't actually know the true cost of the car to the dealership.)
You want to hear about people signing things they don't understand? I really wanted to scream at people after I heard this story. There was a hispanic couple looking to buy a car and they didn't really understand English. The car salesman told them if they signed the contract, they could drive the car as much as they wanted. He neglected to mention to they actually had to pay for the car, and so they took the deal. You can guess how that worked out. Course the salesman didn't care; he got his commission. I'm not saying they're all like this, but some of them are complete trash.
In fairness, the system has gotten to the point that logic no longer seems to apply. Others have reported dealers offering a price discount for using their 0% financing. That's not how it's supposed to work.
I'm losing my ability to say "obviously they can't mean that".
That is literally how my financing of the LEAF went with NMAC (Nissan finance arm). There was an ~$1000 incentive from NMAC iff I financed through them at 0% for 36, 48, or 60 months.
Uh, OK. I checked the paperwork carefully and it was mathematically as-stated.
No evidence of that and in fact, one of my first payments was late as I was setting up auto-billing and there was nothing more than a letter in the mail reminding me.
I'm still baffled as to why/how they decide to run programs like this. Maybe it gets them information about when I contemplate selling the car (as I'd maybe have to ask the payoff amount)?
They could potentially come out ahead, if the small loss on the financial asset is less than the margin on the MSRP of a sold vehicle, vs nilch on an unsold one.
When it comes to PHEV and electrics there are sometimes other factors at play as well. Sometimes these vehicles are used as a source of carbon credits and sometimes they're used by a manufacturer to offset their less fuel efficient cars in order to comply with various fuel economy regulations.
Had the same thing in the UK. They were desperate for me not to pay up front so they could try and sell me some other finance product that would cost me more / enable me to spend more without understanding the true cost.
This kind of credit for cars / housing / uni / whatever is just not helping people afford things they would otherwise defer buying. It's predatory. It's pushing up the price of items. It has no place in our society. It should be tightly controlled. Finance is pulling forward demand to get tomorrow's bonuses today and to hell with the consequences tomorrow.
If we want a better world we have to regulate debt issuance. Yes some kids from poor backgrounds can't buy a nice car even though they are doing a law degree at Harvard and will be able to cover it no problem in 3 years time. The flip side of the coin is far more damaging.
Yes some kids from poor backgrounds can't buy a nice car even though they are doing a law degree at Harvard and will be able to cover it no problem in 3 years time.
I think you're underestimating how poor most people are. 60% of Americans wouldn't be able to cover an unexpected bill of $500[1]. Most people just don't have any money saved, or money left at the end of the month to save any. This isn't about young people buying nice cars; it's about the majority of people buying any car. Clearly cheap credit adds to the problem, but if the ability to borrow disappeared overnight a lot of people would have tremendous difficulties.
You've completely missed my point. The ability to borrow sets the price. This is how prices on goods are set, not by how much it costs plus a "fair profit".
That seems insane that it'd be the biggest check they've seen. I've bought an 80k BMW and an 80k Jaguar outright, and they both shrugged at me paying by check. BMW let me use a personal check, Jaguar wanted a bank check (easy enough).
Edit: A normal down payment for a luxury car of any brand can easily be 20k up front.
That heavily depends on where you go and the area. Not the same as a car, but when I went to get the check for the down payment on my home (which was 6 figures), I went to my bank which happened to be in a pretty upscale neighborhood were houses were significantly more expensive on average than what I was buying.
So when I asked the teller to give me a multi-hundred-thousand dollar check, they didn't even blink. "Please enter your pin number sir. There you go sir, have a nice day".
I assume this is very similar. A place selling BMWs is probably used to seeing newly minted millionaires on a daily basis.
It's weird getting big checks if you aren't used to it. I had some money coming out from a home sale and got a cashier's check for 50k or something. They asked for ID and checked it very slowly, but nothing past that.
I paid for my current car with my debit card. I asked my bank beforehand whether they needed to authorize that size of transaction but was told that they can tell which accounts are for car dealers.
I wondered about that when I bought our last car. Near the end of the transaction I suddenly realized that I would need to pay a down payment and all I had was my bank card (ran out of paper checks years ago). They took it and ran it as a Visa card, no problem. Guess they get a break on the fees.
I feel like there is a natural tension between adults having the right to make their own decisions, and 'protecting' them from making bad decisions. Maybe what we need is a two-part market for financial services, a tightly regulated one where only regulator-approved, simple products can be sold, and one with much looser regulation, but that only those consumers willing to take a financial literacy exam are eligible for (with the financial firm being responsible for checking, and contracts being void if sold to unqualified buyers). After all, even brokers and traders have to take an exam before they are allowed to trade more complicated financial instruments (https://en.m.wikipedia.org/wiki/Series_7_exam). We also don't allow people to drive a car without proving they can do so reasonably safely.
The public could reasonably assume that the government might provide guarantees for products in the first group, in the way they do for bank accounts. Products in the second group would explicitly be excluded from any government guarantee - if you passed the exam, and want to risk your own money, totally up to you, but don't come expecting your fellow citizens to bail you out if things go terribly wrong later.
So for example, interest-only home mortgages are almost always a bad choice for most consumers, so they would probably be in the second group. So you could still get them if you really wanted one, but you would have to prove you knew what you were doing, and were willing to give up any hope of a government bailout.
I feel that there should be two types of contracts in the world
1. Take it or leave it, fine print consumer contracts, which includes most loans. These contracts should very limited in power / heavily regulated.
2. Negotiated contracts, where both parties sign, both parties have the power to negotiate for different terms, both parties have legal representation. These contracts should have very little regulation.
interest-only home mortgages are almost always a bad choice for most consumers
Just for future reference, if anyone lets you make an infinitely leveraged 500,000 dollar bet that you can walk away from at any time, you take that bet.
On the other hand, if someone offers to let you make an infinitely leveraged 500,000 dollar bet that you can walk away from at any time provided you are OK with the consequence of being unable to access another mortgage loan or to rent (because of outstanding housing debt), then probably don't take that bet.
But wasn't a big part of the '08 crisis the fact that you actually could walk away from all of it as a home owner and the banks were stuck with the loss? Sure it sucks to be homeless but it suck a hell of a lot less than being homeless with huge debts.
I would think a financial literacy exam would be too much.
I think a large red disclaimer page that says in very simple language: "This contract is unregulated and may be a dangerous financial transaction. Do not proceed unless you know what you are doing" that must be signed should be sufficient.
Simpler, tightly regulated contracts, wouldn't require this disclosure. If implemented well, it should be like the warning page you get when a certificate doesn't validate. Rare and scary is the best way to warn a consumer that something worth paying attention to is happening.
> 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.
And if you agree with that, then let me tell you a story about the healthcare industry...
I liked the term "junk finance". There's a subset of financial products that are essentially the equivalent of going to McDonalds every day, and ordering a Big Mac to go.
While car contracts can be unnecessarily confusing they are not the only opportunity for reform. Service contracts need simplification as well, whether your agreement for internet or cell service, to merely using one of the online streaming services. There is a lot of boiler plate in there that could be minimized with some good changes to the law.
This story is UK based, is there no Truth In Lending type act to help simplify these contracts into terms people can readily understand? A recent car purchase I made in Georgia (US) was very easy to understand, all the numbers on one sheet.
I bought a prius recently and where they were hoping to make the money was on the extended warranty. I demurred on that so I got a 3 year 0% lease.
In addition when you consider the prius' high gas mileage, low maintenance, high lifetime (over 500k miles) and high resale value it's a great deal if you're planning on driving quite a bit.
So I guess the whole car thing is probably going to be this cycle's mortgage bubble? Considering car sales are falling off a cliff I guess we're in 2007 right now.
No one buys a car expecting the value to go up so the vehicle market probably won't unravel in a collapse (vehicle debt is also about 1/10 the size of the mortgage market).
Maybe not, but I heard a debt counsellor on Radio 4 the other morning who said that bankruptcies were going up hugely in the UK, and that the main cause of them was PCP - the interviewer was quite surprised by it, but the guy said it was (IIRC) an epidemic. Can't find the link for it (I have R4 on in the morning at 6am when I wake up, and not sure what day it was), but it was only a couple of weeks ago.
Possibly You & Yours? There was a section on PCP a couple of weeks ago, might get repeated early in the morning. Although it sounds like there was a report on it so maybe a few people have done articles
No, but they expect the value to be a certain amount in 3 years time. If a lot of consumers jump on this and a majority of them jump on the next 3 year contract after that then there's going to be way more used cars on the market in 3 years time than initially expected, causing values to collapse. You don't have to assume a rising value in order to have a bubble.
It is true however that it's a really small market compared to housing, car companies also aren't critical to the economy as a whole in the way banks are but it would still be bad.
That's not the point. The problem is when the person loses their job. A downturn in the economy would lead to job losses and wave of defaults on vehicle repayments.
These are the very high end vehicles, as seen on the motoring shows with a mention of how you can't buy one because they are all sold. They are sold to the existing customer base, selected customers only. In some way this is like BitCoin in that every one of these vehicles will have some log book back to when it was 'mined from some factory in Northern Italy'. Unlike BitCoin these cars are real things with engineering wonder to them.
We also get told that these 'halo cars' cost the manufacturer 'twice' what they retail at. So the Bugatti creations of the VW group 'apparently' cost far more to research and develop than was recouped over the car sales. The project as a whole being like A380 financing - the R+D never paid off. This 'legend' goes back to the first supercars for the road - the Porsche 959. Even the rebooted Ford F40 was with this same legend.
What is going on here is a genuine collectors market with vehicles actually getting raced, repaired, rebuilt and polished. This is an expensive hobby.
Beneath this market something else is going on and I am sure finance has a lot to do with it. High end SUVs are desirable for people who like such things but they must depreciate faster than I get paid and they don't seem to have the mechanicals to last more than 5-10 years on the roads. Where do all the old Land Rover group luxury products go? Maybe there is some part of Serbia or somewhere that takes all these vehicles and they serve out a long and dutiful life, but I suspect not. The only way I can see these products as viable is if the manufacturer offers the finance to make it so.
> Porsche Financial Services - a trading name of Volkswagen Financial Services [VWFS], with finance provided by VWFS - offer different finance plans across the Porsche model range. To find the right plan for you from a selection including Personal Contract Plan, Lease Purchase, Hire Purchase and Contract Hire, simply explore the options below or contact your local Porsche Centre for an individual and personally tailored quote.
Additionally, if you're in the market to buy a $850,000 car as an investment then you probably have better assets to use as leverage (Property, stocks, etc) which are less prone to suddenly becoming worthless, as a car would be in the event of a major accident.
yes they are. rich people get loans to buy expensive things instead of giving up the cash, often collateralized by their other toys/stock/trust fund/whatever. rich people also overspend, over-leverage, and overindulge just like everyone else.
the difference is they call up their banker and accountant instead of filling out a form at the dealership.
if you're expecting an asset like a 918 or 911RS or R to go up in price, you'd be stupid to not leverage your cash at a low interest rate and put the rest of it to work somewhere else. at this point it becomes a business move, not a trip to the mall. it's like financing a construction project.
do you think they buy jets and yachts and big homes in cash also? of course not. they setup holding companies and finance the purchases, and then charter or rent the asset out to make some of the money back and to pay the crew of people that run these types of properties. that's why you can rent an amazing vacation home for $1k a night, or spend a few days on that yacht with a bunch of friends for $5k, or rent a ferrari for a few hundred bucks.
rich people are exceptionally good at monetizing and leveraging facets of their life that look like giant expenditures to you or i. poor people try to emulate this behavior, and meet their financial ruin, because they aren't savvy or rich enough to make it work.
I'm plenty of aware of how people with assets are able to use them as collateral to borrow money, but this article has nothing to do with that kind of financing. It's about 72mo high interest loans on cheaper downmarket cars marketed to people who used to buy old junkers.
> Graham Hill, of the National Association of Commercial Finance Brokers, told the FT recently that using a PCP, drivers could pay less for a new BMW or Mercedes than for a second-hand Ford Focus. Or, as Bob the Dinosaur might put it, “they just make you sign papers!”
People don't tend to think of BMW or Mercedes as cheaper down markets cars.
Perhaps not in the UK, but in many parts of the US the leased (low-end) 3-series or C200 is the car if the so-called $30,000 millionaire (i.e., people living a lifestyle they can't actually afford by renting all the trappings).
The lower end BMWs are not fancy cars in the UK either. I don't know if they'd class as "cheaper" or "downmarket", but the typical example probably isn't exactly the opposite either. There are a lot of 3-/4-cylinder 1-4 series on the road, and the 520d is common too. Something similar applies to Mercedes and Audi as well.
Interestingly, lesser cylinders is spreading up the range of BMW (and other marques) and no longer an indicator of a cheap model. The 2017 330i is equipped with a 2.0-liter turbocharged four-cylinder...
>if you're expecting an asset like a 918 or 911RS or R to go up in price, you'd be stupid to not leverage your cash at a low interest rate and put the rest of it to work somewhere else
This only makes sense if your bank thinks it will go up in price and will lend you the money at low rates based on the car itself as collateral. If you're getting the money at low rates based on other collateral (like you suggest above) it makes no difference if the car value goes up or down. If you think you can make more return on your other investments than the loan rate you leverage, the rise or fall of the value of the car is irrelevant.
uh, no, the bank will loan you the money no matter what, as long as they think you can pay it back or you can put up collateral to forfeit in case of default.
they're not in the speculation game, they're in the loan making game.
But the interest is lower the more stable the leveraged assets. I get a lower interest if I mortgage my house compared to if I borrow with stocks as leverage, which in turn is lower than a car loan which in turn has lower interest than a loan with no leverage, even if I have a solid income and a stable employment.
Banks are actually very much in the speculation game, which is why different people get different interest rates for the same loan, they speculate that the person with the lower interest has a better chance of paying back the loan. See also the financial crisis of '08
You're arguing that the price of the car going up or down makes a difference for the decision if you should use a loan or not to buy it. That only makes sense if the loan is based on the car value. If the loan is based on other collateral the price fluctuations of the car are irrelevant to the price of the loan and don't enter the decision at all.
>no i'm not. i said condition B is often present in condition A, and that given A, you'd be stupid not to do B.
Are you or are you not saying that if the car appreciates you should use a loan to buy it? That's what I read from this sentence at least:
>if you're expecting an asset like a 918 or 911RS or R to go up in price, you'd be stupid to not leverage your cash at a low interest rate and put the rest of it to work somewhere else
What I'm saying that unless you can get that value appreciation to make the loan cheaper it doesn't matter.
Say you have 200k$ in cash and are considering buying two different cars both costing that amount. One appreciates and after 5 years is worth 300k$, the other depreciates and after 5 years is worth 50k$. Say you also have a bunch of other assets (a house, a boat, etc) that you can use as collateral to borrow the 200k$ at 10% over 5 years. If you take the loan after 5 years you've paid 250k$ for the car, doesn't matter which one. If you don't take the loan you pay 200k$ up front for the car, doesn't matter which one. The decision to take the loan would only be more attractive in the appreciating in value car if you could convince the bank to also use the car as collateral, reducing the risk of the loan, and giving you a lower than 10% rate.
The two-step plan for effortlessly being better off than you otherwise would be (I won't say getting rich):
1. Buy the cheapest car you're OK with.
2. But the best house you can afford.
This is simple. Cars (especially new cars) depreciate super-fast; and houses have appreciated at crazy rates at least for the last few decades. Don't put your money in a fancy car.
Which is why contracts should include warnings, as Senator Elizabeth Warren proposed.
Dangerous equipment should have warnings so that you don't lose your fingers and financial tools should have warnings so that you don't lose your shirt.
A decade ago I bought a Fiat (in Brazil) and was offered financing at 0,99% a month. This was worth it, as fixed income investments were paying more than 1% a month. Except that the administrative fees made the effective rate something like 1,99% (which was not worth it). The salesperson argued that I could pay the fees in installments too. It made me angry that they are allowed to do this to people who can't do the maths.
> Which is why contracts should include warnings, as Senator Elizabeth Warren proposed.
How would this work? Isn't the contract itself supposed to be the warning? Obviously contracts can contain a lot of legalese and potentially unenforceable language that makes them difficult for most people to interpret, but that language is also necessary to specify the contract at the level of detail the law requires. If you require a warning for the contract, how do you ensure that the warning is sufficiently authentic?
In Ireland, mortgage offers at least have to have plain-English warnings, illustrations of the numbers involved in paying it off, etc. Never got a PCP, but I assume it's similar. The problem is, people don't read them. To be useful, you'd arguably need to give the borrower an exam in what they're signing (which might be a good approach).
PCPs, in particular, are complex as far as consumer finance goes, and a lot of people seem to sign them thinking they're a normal loan. An analogy seem to be the (now thankfully almost obsolete) endowment mortgages, where you took out an interest-only mortgage coupled with an investment product which was theoretically meant to pay off the principal on maturity. These ran into difficulty when inflation dropped to practically zero for a decade, and lots of people who had them thought they just had repayment mortgages...
I think it may be easy to buy a relatively bad PCP deal, because of the difficulty in comparing like for like when there's a lot of variables in the deal. But I'm not sure that PCP is often a bad deal compared with outright purchase (whether on finance or not), because it creates a lot of certainty, particularly with good gap insurance, and doesn't require a lot of capital.
PCP should be the best way to purchase, just like leases should be. You just pay depreciation/cost of ownership/cost of financing, and don't have to worry about getting out of the car when you want a new one.
But like leases, it sounds like the problem with the PCP is the financial complexity. The option at the end of a lease has actual value, and it's difficult for a consumer to value it properly. The interest being charged is also hidden, making it easy to hit you with a far higher rate.
If you could buy a car on a PCP where the finance costs and end contract purchase price were reasonable and market competitive, it might be great. After all, a car shouldn't always be a forced savings plan where you are required to own it after 4 or 5 years.
Tim Harford does a fantastic podcast called 50 things that made the modern economy. It is some of the usual suspects but mostly things you would not have considered before. Highly recommended.
I can't believe the car bubble isn't a bigger story. I know a waitress who is single, can barely afford an apartment, can't afford internet service, and who just financed a brand new Jeep. This reckless lending is setting the country up for catastrophe. The next economic downturn will cause people to lose their homes and their cars.
It's very good for the loan part of the equation, but it's still often hard to compare lease plans when the depreciation etc is factored in. After all, some kind of unknown valuation of the condition of the car will happen after N years and it's nearly impossible to know beforehand what cost that will incur.
The bit about banning complex contracts is funny, especially contrasted with the alternative of having machine readable versions. My guess is that a machine readable format sufficient to express all the complexities of these contracts, especially conditional payments, is going to be Turing-complete, or pretty close to it. Anyway, it's going to be really hard to do that third-party comparison. The obvious solution is to only allow contracts that can be analyzed in some tractable logical framework... but limiting complexity is where we started.
I don't think that this would be as large scale an issue in the United States at least if public transportation was as good as say, Japan's.
That would put a lot of pressure on the industry indirectly to be more transparent to the average consumer. I would think anyway. I don't have anything except anecdotal evidence and a gut feeling to back this up.
I think car ownership being needed outside the major 12 cities (Lookin' at you NYC!) that have good public transit is a national crime in and of itself.
The idea of not paying cash for a car is insane to me. A could justify a loan for a house, or even an education. But a car?! I just don't even understand this mindset.
My aunt lectures at a nursing and hospital-school. Many of her pupils are stuck in the "Car"-Deal. They all leased or lend a expensive car to show off, got into accidents or expensive repairs, could not pay off the accumulating debt, and now are basically indentured in debt-slavery to the car industry with half of their monthly paycheck.
In the UK a new car purchase/lease requires comprehensive insurance for the duration of the lease. Only after the lease has expired and you've purchased could you opt for 3rd party, fire and theft insurance.
The maximum exposure during the period of a lease is whatever the excess on the policy is.
I never take a loan to buy a car or motorcycle, but I have written off a few vehicles (all my fault, and none involving other people. One amusing-in-distant-hindsight-only case was when I spilled paint all over the interior of a car, written off by the insurance company as beyond economic repair).
In each case I only got the value of that vehicle as per the lowest price the insurance adjustor could find, taking the mileage and age into account. That was never enough to buy something of equal value to me, and I assume totally inadequate to pay off the outstanding loan amount.
You are required to get your own fully comprehensive insurance, and can select from the whole market. The vehicle will not be released to you from the car dealership without proof that you possess such insurance.
Please declare which country you are talking about, as the article described the UK and your claims are not true with regard to the UK.
There are many UK car dealers that will sell you a 7 day insurance certificate to 'drive away today'. This is quite convenient usually as it allows them to tax the car as well for you, so it becomes road legal.
Perhaps the insurance only covers the current car value, not all future interest payments and as such there is still quite a bit left even after insurance claims.
I noticed that the people saying this type of financing is a good deal, were comparing it against just buying a new car outright. But, you don't have to buy a new car.
In general people are sitting ducks when it comes to being fleeced by parties with a plan.
I always wonder why schools don't even teach the beginnings of finance to everybody. You'd almost think there is a reason why it explicitly is not being taught.