I’ve seen some crazy stories on YouTube about people trading in cars they’re already underwater on just to finance an even more expensive one. I can’t understand why banks keep lending money for deals like that.
> I’ve seen some crazy stories on YouTube about people trading in cars they’re already underwater on just to finance an even more expensive one.
This has happened for as long as there has been car finance (i.e. practically since the dawn of private vehicle ownership), it's nothing new.
Given most folks cannot purchase a vehicle outright, the customer only really cares about the monthly payment, a sizeable amount of whom do not even understand the concept of being "underwater" on a trade in. The industry has always preyed upon the financial stupidity of most car buyers.
"the customer only really cares about the monthly payment,"
I noticed this when I bought my Subaru. There was a young couple next to me that worked hard with the sales guy to get an acceptable monthly payment for their desired car. No thought about actual price or duration of the loan. I wanted to scream at them that they were making a big mistake.
Car salesmen also want to get you to focus on monthly payment instead of price.
It’s easy to manipulate the payment by adjusting the loan term without actually taking anything off the price. And then the finance manager can further manipulate the payment by upselling you additional products and saying it’s only an additional $7 per month instead of saying nitrogen in your tires will cost $336.
Agreed. I usually have to remind the salesperson to stop talking to me in monthly payment terms. I always tell them to talk to me about final price including all interest.
It's a bit of an uphill battle, where you have to tell them over and over. They're just so used to trying to sell the monthly payment. It's really no wonder that people that don't understand interest (many if not most) will fall for this. And if you actually can't really afford the car, it's also understandable why many if not most people will "gladly" fall for it. The alternative is not having the car of their dreams.
That said, financing in general isn't bad. I've financed most of my cars. I wouldn't have had the sort of "emergency fund" to just outright buy the car and financing allowed me to get the car when I needed it instead of buying some "temp beater" and taking even longer to buy the car I really wanted when I needed it and I paid it back with priority (i.e. faster than the financing terms required it).
Temp beaters are not that bad, if you choose them wisely (like a boring 3-year old Toyota). Nothing fancy, no surprises, years ahead with just basic service. And a small crash will only break your car, not your heart.
I bought a new vehicle in 2023 after years of not owning a car. I was trying to buy used, but the delta between new and 1-3 year old used was so small it made no sense to go used. I was giving up a warranty for often times $500-$1500, total.
This is still true, and especially true for brands whose used vehicles command a price premium, like Toyota. Used values are still high relative to historical norms because a lot of the market that normally buys new vehicles is priced out of buying new, and some of that demand has been absorbed by the used market (some of it has dropped out of the market and/or deferred a purchase until later).
The idea of buying a relatively low miles 3-year old Toyota for materially less than a new one doesn't really exist, currently. Now, if you want to go for a 3 year old car with 150,000+ miles, sure, you can save some money, but that's a ton of miles per year. You're counting on the previous owner(s) being _really_ on top of their basic maintenance.
How much cheaper is a boring 3-year old Toyota versus a boring brand new Toyota? Why would the person who buys a boring new Toyota unload it for a significant loss after just 3 years of ownership?
a 3 year old toyota is a temp beater? I bought a 5 year old toyota and consider that pretty luxury compared to the 7-10 year old cars I've always previously purchased (edit: and I'd never call them beaters either, I've always looked after them). I've never financed a car, I think it's a crazy thing to do when there are so many good used cars available. And new doesn't mean without problems either, usually you can get good information on the reliability of older models that you won't know for new ones.
3 year is not a beater. My dad used to buy a new car every 3 years, back in the hey days when his company would have a deal with the local dealership (of one particular brand that they like for some reason - probably CEO friendship or something) to get their employees better terms (without negotiating), so we enjoyed a new car every 3-ish years when I was a kid. But that's not a beater.
The beater cars I owned were about 10 years old when I bought them. And I drove them for like 3-ish more years before selling again.
When I bought my most recent car I drove the financing guy nuts because I kept going back to total price instead of caring about payments. Was clearly making him sweat a little bit.
Basic personal finance should be one of the top things people learn in high school. It's wild how many people have no concept of how loans and interest rates work. I didn't learn anything about that stuff before high school and it's some of the most important knowledge for a typical consumer in our society.
Arguably cars became “unaffordable” sometime when loans became common - what percentage of cars being bought in credit can be argued, but clearly it’s become more and more.
Loans appeared almost immediately alongside the invention of the private motor car (~1920 Ford/GM had to start offering financing on private vehicles to make them affordable), with 60-75 percent purchased this way in the 20s. Today its 85 percent - there wasn't really ever a period private car ownership didn't involve finance, at least in North America.
> Remind me if I’m wrong but didn’t something dramatic occur financially in the 20s?
"The practice of Americans buying consumer goods on the installment plan dates back to the Civil War," e.g. for sewing machines [1].
America's first affordable car, the Model T, was released in 1908. In October 1919, less than one year after the Armistice of November 1918 and just four months after the Treaty of Versailles, GM had "created a financing arm called the General Motors Acceptance Corporation (GMAC)."
You said "cars became 'unaffordable' sometime when loans became common." That is wrong. Cars became cheap because of industrial production. Production aimed at the American consumer, in part, due to the post-Civil War prevalence of installment-based purchasing of factory-made goods.
>America's first affordable car, the Model T, was released in 1908. In October 1919, less than one year after the Armistice of November 1918 and just four months after the Treaty of Versailles, GM had "created a financing arm called the General Motors Acceptance Corporation (GMAC)."
(Now known as Ally Bank, the online bank popular for relatively high interest rates on deposits).
Hopefully we won't be testing FDIC coverage with them...
You're moving your goalposts to easily-tested--and disprovable--ground.
The flip side of limited recourse is limited liability. For houses, non-recourse lending promotes speculation, volatility and risk shifting [1]. One would expect similar effects if non-recourse lending were normalised for cars: higher prices, bigger booms and worse busts.
I had a car salesman tell me he'd never met anyone else who cared more about the total purchase price than the monthly payment. That might not have been true, but it's probably rare. It was pretty maddening how he kept trying to charge me more, but over a longer term loan.
It's crazy how many people do just look at the monthly payment. It's not like X price over Y years is complicated math or anything.
> I can’t understand why banks keep lending money for deals like that.
Because if they ever stop lending the music just abruptly stops. The entire US economy grinds to a halt and takes the entire world down with it. Even just raising the interest rates is enough to provoke cataclysmic events that wipe out billions and billions of dollars overnight. I can't even fathom what would happen if banks stopped lending money.
The US economy is so addicted to cheap credit it would rather forgive debts and bail out banks than let it all come crashing down. Debt is so pervasive, everyone is so thoroughly leveraged, that if there's too many defaults it would cause an endless cascade of further defaults that could threaten the entire economy. It'd take an act of god to fix this.
Where in the text of their comment did they say that?
The sentence you quoted doesn't have anything to do with the point you claimed they're making.
And the GP is right: banks have to lend because the system is set up to use credit for investment, personal consumption, and to balance shocks. Doesn't take anyone being altruistic.
They are propping up the world economy though. They're not sitting on top of their cash reserves like dragons and their hoards. They are "efficiently allocating the capital" by lending at interest. That's the number one cause of inflation. They make it so there's so much money circulating it slowly becomes worthless.
Someone needs a $1,000 loan. Bank issues it against some collateral. They grab the cash and spend it. Whoever receives that money deposits it at the bank. They keep $100 and loan $900 back out. It eventually gets deposited again. A significant fraction is loaned out again! Then it gets deposited again!! Then $1,000 turns into $100,000 literally overnight! Not one cent of it real until the loans are paid back, until somebody actually goes and extracts value from this planet! Exponential growth in a linear planet, it's unsustainable.
The entire global economy is leveraged this way! It's not real until the loans are paid back! If people start defaulting on these loans, it's fucking over. People depend on those payments in order to pay back their own loans. Defaults generate more defaults which generate even more defaults, like a society level stack unwinding. Next thing you know the government is "injecting liquidity" into banks. If they don't bail out the banks everything come crashing down.
We live in the age of CBDCs, of programmable currency. We have governments speaking of negative interest rates and expiring money to drive consumption. People have to keep consuming, they have to keep spending money. The motor of capitalism must keep turning. Otherwise the loans go unpaid and everybody gets liquidated.
> . I can’t understand why banks keep lending money for deals like that
Because that's literally the only way banks make money. Cars, houses, whatever -banks are after the interest money. The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day. The real money in this is the interest that the bank will take. This is why if all people decided to withdraw all their money, banks would refuse, aka a bank run. In fact, this issue -the credit creation with fake digital numbers in accounts for the purpose of making profits out of the interest- is the reason why house prices are going insane beyond their actual value, it’s never demand and supply.
I'd say the problem with house prices is that unlike with other assets, a regular person can go absolutely insane with the leverage on Real Estate because it can be used as collateral that is expected to hold value, thus interest is low and you can only put in a small down payment
so mix in the "house prices always go up" and you've got a whole nation (world?) who are using housing as the ultimate get rich quick scheme
all while leveraged quite a lot because hey, the prices will never go down so why not, it's a profit multiplier!
And you pay the rent via the tenants who will always be out there to rent any property no matter what.. it's not like the economy will somehow suffer and people will be unable to pay that ever increasing rent right?
> Because that's literally the only way banks make money. Cars, houses, whatever -banks are after the interest money.
Lending for bad investments isn't a way to make money. It can work for the banks if they resell the loan, but in that case one thing they definitely aren't after is the interest money on the loan they no longer hold.
> The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day. The real money in this is the interest that the bank will take. This is why if all people decided to withdraw all their money, banks would refuse, aka a bank run.
The reason banks "refuse" to redeem all of their deposits at once isn't that this would stop them from earning interest on their loans. (This sounds like nonsense, but I don't see another way to interpret your sentences...?) It's that they can't, because they are never holding enough money to cover all deposits at once.
> The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the "trust" that you can withdraw all of it one day.
Also, this sounds like you're describing a loan from the customer to the bank. A deposit can indeed be modeled that way, but in context you appear to be talking about loans from the bank to the customer. Can you clarify this?
> because they are never holding enough money to cover all deposits at once.
Yep, that's the reason (not the other one you mentioned), which means banks are creating money without actual assets backing it up. It's fake numbers basically created out of thin air, but that's not an issue as long as it will make money, real money, from the interest. The concept of modern banks when it was created was that this money is the receipt of actual gold you own, or the bank owns, so when you give these receipts to someone instead of actual gold (which is safer and easier) they can go and withdraw the gold using those receipts. Later, people started using these receipts instead of taking the gold and redepositing it again. Till here things are fair. Later the banks got greedy and started giving receipts for loans without having enough gold, and if someone ever decided to take the actual gold and the bank didn't have enough of it, they would borrow it from another bank, which kept banks in check because they couldn't go crazy with loans (to maximize their interest aka profit) until gold was no longer backing up those receipts (1), and banks are creating credit just because they can, resulting in an overinflated assets, especially the ones that are seen as investments with speculated values not real cost, rendering the housing market a legal state-sponsored Ponzi scheme. And the government is happy too because even after "owning" the house you still have to pay a perpetual rent aka property taxes that will increase when the house value increases as well, so everyone is winning except the home "owner", in fact, the attack on work from home was because the taxes the government collected from commercial property and residential ones are getting lower, it was good for the people to live in cheap locations, but bad for whoever is collecting the taxes.
For the last point, your deposit as a customer is in fact a loan to the bank, and the bank is your customer, but I was talking about bank loans to the account owners that they take to purchase/invest/etc., with added interest.
> which means banks are creating money without actual assets backing it up
It means they're creating money. That money is backed by actual assets; that is, for example, what's going on when someone forecloses on your house.
> I was talking about bank loans to the account owners that they take to purchase/invest/etc., with added interest.
How does this work with the comment "The loan is a fake number that gets transferred from your account (as debt) to theirs, as digital numbers too, all under the 'trust' that you can withdraw all of it one day"?
A loan from the bank to you is generally withdrawn in full, immediately, because you need to use it to pay for something else. A loan that isn't withdrawn in full isn't called a loan, it's called a line of credit.
I think what they mean to imply is that banks create new money out of thin air and the actual value of the assets would be lower if these new loans were curtailed.
Good news is the current US government is rolling back all of the regulation to prevent these bad loans from being given out, just to keep the music going for a little longer before this all blows up.
My childhood friend's brother has gone through so many new cars I lost track, and never paid off a single one of those loans. We're talking a pattern that began in the late 90s with this guy.
He now lives out of a truck that's.... wait for it, not paid for!
I mean... I guess he's been in new cars his whole life then? And he manages to come up with the money for it. Good for him? Wonder what sacrifices he made in other areas of his life as a trade.
Long ago I had a girlfriend who was still paying on a Ford Bronco which had broken down. The repair was going to cost $300, which she didn't have.
She was able to trade that car in for a brand new one without spending any money. It was literally cheaper (in the short term, of course) to buy a new car than to fix the old one.
It was one of the reasons we broke up -- she was the type of person who counted the amount she could borrow as an asset.
Banks keep lending money for stuff like that because they can repossess your car if you stop paying.
It only has to sell for more than the remaining cost of the debtplus repossession and storage cost. Unless someone defaults on their payments very early into their term or totally trashes the thing, this should be achievable more often than not.
There is no way to prove this is true or that if true it happened more than once (people get millions of loans every day, and once in a million per day is a tiny number)
Houses are a much better long term bet for buyers, but car depreciation is more predictable. Lend someone 500k to buy a house and during a recession it might tank in value by 20-40% while a bunch of people walk away. Worse the’ll likely pull out their equity before defaulting in mass.
Cars value on the other hand is more counter cyclical. When the economy is bad people still get into accidents etc but they now want to buy used cars instead of new ones. Even better it’s just less money being lent out at higher interest rates.
That's why banks require huge deposits though, or charge you for insurance for this exact risk. If the house tanks 20% but you had to put in a 20% deposit in + whatever payments you made up until that point, you eat all of the losses first before the bank.
In 2024 only 52% of US buyers put 20+% down on a house and which is up from 2022. Worse as a share of outstanding money new loans with low down payments obviously count for more. IE a 30 year loan on a house at year zero likely has 10+X as much outstanding vs a 25 year old loan due to principal payments and inflation on the average value of homes.
PMI is there to reduce risks, but PMI isn’t an infinite pool of money independent of the rest of the economy. It’s on someone’s balance sheet.
I can envision a future (maybe even the present in some areas) where increasing prices of skilled labor and/or materials results in a structure’s price increasing even though it is aging.
I mean, the simple fact of inflation and urban flight during the covid spending bubble did indeed cause prices to go up quite a lot for many properties.
