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.
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.