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I recently stopped working at company that actually provides creditor insurance for auto loans for car buyers, so I have some really good data and insight into the auto marketplace. The 63% figure is a shocking new industry norm, but that doesn't tell the whole story. A third of customers walking into the dealership to purchase a new or used vehicle are currently in a negative equity position on their trade-in. The average negative equity being rolled into these deals is over $4,200 in Canada. In the last 36 months, OEM captive finance arms have moved from 60, to 72, to 84, to now 96 month financing terms forcing my former company to redevelop their line of products for the new actuarial realities of these loan terms. The scary part for the auto industry is that we're taking people out of their current cars and burying them in a long term loan with negative equity that they won't be able to climb out for a decade. For OEMs and dealers, they're shooting themselves in the head long-term. These customers will simply not be in a financial position to purchase a new vehicle in 5-8 years, because not only have they not paid off their current vehicle, they won't have paid off their newly depreciated one either. When interest rates go up, the auto industry is hosed. These loans, and the banks who finance them, are going to be ruining a lot of Canadian's financial lives. If you've buried $4,200 in negative equity in your new vehicle, and you get into an accident where you write it off - the insurance company will only pay the cash value of the current vehicle. I saw customers with write-offs which had negative equity rolled in to the new deal be $10,000 or more out of pocket after a total loss.
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Nov 22, 2013 21:45
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| # ¿ May 16, 2024 12:40 |
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Lexicon posted:Why the transition to longer terms? People's personal finances are hosed (largely due to housing / stagnant incomes) I'm guessing? EFFORT POST incoming. The trend started in the US, as an alternative to leasing after the finance companies blew up in 2008. (A lot of the reason they blew up is because the leasing companies were loving around with the residual values of the vehicles to drive the payments down to capture marketshare from other manufacturers, and when they repossessed vehicles, they couldn't make enough back on the wholesale of the car to cover enough of their losses.) Here's why leasing was important. In the industry it's called "automotive share of wallet" - the amount of money the average consumer can afford to pay in a given month for their transportation costs. ASOW has continued to shrink with the decline in real incomes, decline in household savings (due to a variety of factors) and an overall increase in the costs of living across both countries. Leasing was the 'low payment' option for people who had tight wallets for whatever reason. Forget about the total cost of borrowing - the type of people leasing did not have the cash flow to support a full loan, they needed to get into a car to get to work, and the payments could be manipulated by the manufacturer through screwing with the residual value of the vehicles on lease return. (The OEM would essentially gamble that they'd make more on the financing, and be able to re-market the vehicle at a profit through a dealership to make up for the losses on the paper residual value. If the plan backfired, the OEM would just screw its dealers, who would be forced to re-market the vehicle at an unreasonable price through a Certified Pre-Owned program, and the OEM escaped the risk.) Once leasing was gone, the solution for auto lenders of all stripes was to stretch the terms to take up that market demand for low payment customers with poo poo credit and no money down. They also started stretching the terms to lower payments to also encourage buyers in the recession, pulling demand forward. When one OEM makes a move to stretch their term, or one bank makes a move like this, the others will follow in a herd mentality - regardless of the long-term risk. The car business operates on a very short sighted mentality. Thus started a race to the bottom for interest rates, a spiral upwards for loan terms to keep the advertised payments lower and lower. Then came the big retail banks in Canada. They were making poo poo money in the retail lending space, mortgage regs were getting a little too onerous for their bankster minds, and there was a healthy profit in sub-prime auto lending. Boy did the big five roll in. ScotiaBank set up Scotia Dealer Advantage to compete in the non-prime space. TD bought VFC (another sub-prime company) and re-named it TD Auto Finance. BMO ratcheted up its Airmiles reward program for dealers. Now, in Canada if you have a pulse and a job, you can qualify for financing. At 8.99% for 128 months. No problem! 10 years ago, if you couldn't pay off your vehicle in 36 months, then you couldn't afford to drive. Oh how the world has changed. On dealerships and zero percent financing Since I'm now working in digital marketing for dealerships, I can shed light on this a bit. Dealerships make good money selling cars. We usually make about a grand a vehicle in gross profit on each sale to the customer, receive a cut from the OEM for each vehicle sold (2-3%), called the holdback, plus volume incentives from the OEM. We also make money on F&I - extended warranties, rims, tint, life insurance, tire and rim warranties, rust proofing, etc. We also make money, as mentioned on what's called 'fixed ops' - the service department. In fact, service department is what keeps the lights on in most dealerships. When it comes to 0% financing, or low rates, these aren't the dealers problem. The business manager in the dealership who arranges the financing gets to broker it with either the OEM's captive finance arm, a retail bank, or a financial institution. The business manager is a commissioned sales person - he gets paid out of the extra stuff we sell. The banks will actually pay the dealer, and the business manager a fee for originating a loan on their paper that gets approved. The higher the interest rate, or the better quality the paper, the more they make. In fact, I've seen bank and financial reps and others offer 'undies' - under the table bribes to send business their way. The manufacturers will arrange 0% financing or other low rate offers through whats called a subvented loan. They're loans offered by a captive finance company, or a bank partnered with the OEM with artificially low interest rates. The low rates are used as incentives to entice buyers into dealer showrooms. The manufacturer supports the lower rates with a subsidy paid to the captive finance company enabling rates that are below the normal lending market values. The manufacturers are making enough on the gross profit of the vehicle itself to support the subvented rate. If they aren't making enough - then they start bleeding money. Then they go bankrupt, like always. Then they get bailed out, like always. Welcome to the car business. It makes the housing finance industry look like it's built on a solid foundation. 
Rhobot Mk. II fucked around with this message at 23:49 on Nov 22, 2013 |
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Nov 22, 2013 23:40
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Cultural Imperial posted:Thanks for posting this Rhobot. I had no idea how this worked until now. Shout outs to the dumb rear end Business Manager at Docksteader to go shoot herself. Not alchemy, nor fraud, just creative calculations to leave the dealers holding the bag. In the car business, it's always about leaving someone else holding the bag. Car dealers are often given just as much of a shafting as the consumers are. Leasing is a great example. When calculating a lease payment, the leasing institution has to make a future prediction of the vehicle value at retail. (i.e. calculated depreciation of the asset due to wear and tear, with consideration of the popularity of the vehicle, its reputation, its style, market demand, etc.) What they were doing is giving polyanna predictions of how well the vehicles would hold their value. An equally priced KIA will tend to depreciate faster than an equally matched Honda, for instance. When you have a captive leasing arm, they'll give an overly optimistic projection of the future market value of the car. Because the depreciation factors into the lease calculation, you can effectively lower the consumer payment by inflating its future value. Throatwarbler posted:CPO is just any trade-in that fits their criterea (usually meaning it's the same brand as the dealer - BMW in a BMW dealer, etc, certain mileage and exterior condition) that they will take instead of sending to auction and sell with an OEM-type warranty. They'll just sell for the same as a car with an equivalent aftermarket warranty will. Not exactly true. While many CPO programs are just setting a minimum standard for a vehicle's condition before it can wear that badge at retail, many more are in fact captive lease-return vehicle programs. OEMs & Captives are loathe to dump a huge glut of leased vehicles onto the wholesale market, especially if the vehicles are well below their predicted wholesale value. If they deliver a huge glut of these vehicles to the wholesale market, the price they command drops commensurately and magnifies their losses. So they make someone buy them at a better price. The dealers. Many OEMs mandate through their franchise agreements that dealers must buy back from the OEM captive a certain percentage of the vehicles they have leased through their dealership. In return, the OEM pays a flat fee to cover the cost of reconditioning the vehicle to CPO standards. Here's where dealers get screwed though. The reconditioning fee may be far less than the actual cost to recondition the vehicles that are arriving on their lots to the standards set by the OEM. Also, if the vehicle is coming back with the OEM & Captive saying the residual value is $20,000 (when in reality the wholesale value is closer to $18,000), they're going to take a loss on it just bringing the vehicle into their inventory. Then they have to recondition it. Then they have to pay interest on their inventory financing (floorplan), and then they have to pay the staff to sell the vehicle. The dealers will have to mark the vehicle up commensurately, but the market will only bear so much, especially for certain models which are affectionately known in the car industry as turds (we're a creative bunch). The OEM will provide a bit of lube for the dealers by providing CPO extended warranties to help move the cars. These are just insurance products, which are in themselves another actuarial gamble on the part of another insurance company to try and make a little bit of money. The captive will pay the insurance fee, and the insurance company better hope they're charging enough premium, and denying enough claims to make a profit. The whole industry is a house of cards, really. But then again, many other industries play the same games. It's just that cars are the second largest consumer purchases next to real estate - and unless they're exotic cars, they're an asset class that never appreciates in value. The systemic damage to the overall economy can be huge when the house of cards comes crashing down, hence the bailouts in '08. The business model won't change so long as the taxpayer continues to backstop the risk on these tactics, which is why the whole 'socialize risk, privatize profit' gets brought up often.
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Nov 23, 2013 03:01
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Eej posted:Man, I'm a little confused about the 0% financing thing. I myself am in a 6 year 0% financing loan for my car. My simplistic reasoning was that instead of paying it all up front, I pay it out at 0% interest over 6 years, then I can dump the money I could've spent on a downpayment/the whole thing on an investment that actually has returns (got in on AAPL at $300!). I'm not really planning to upgrade my car in that 6 year time span so I don't really see any personal downside. Am I somehow contributing to the collapse of the Canadian economy or something? Not to be flippant, but you're not contributing to the demise of the Canadian economy. You're helping me have a job  I can't tell you whether it was a bad decision for you personally without a spreadsheet and crystal ball. However, you probably could have paid thousands less for your vehicle if you had the access to capital to pay cash. The OEM has incorporated the cost of borrowing into the price of the vehicle, and effectively hidden it along the retail supply chain through the tactics I've listed. Whether they priced it correctly will determine whether they're bankrupt in five years or not. Dealers will sell their cars for, in some cases thousands less, than their 'best financing price'. If you bought the right car, drive it until the wheels fall off from rust, and don't get the urge to trade it in for the latest hot model or get into a catastrophic accident, you'll be fine. Unfortunately, most people don't have the fiscal and self-discipline to make that happen. Also, accidents and life tend to get in the way too. Cultural Imperial posted:Eej, I think the problem is that if you had financed the car over a period of 6 years, the assertion is that you would end up with an asset, no matter how much it has depreciated. The alternative with leasing is that you end up with nothing. If you sold your 6 year old car, you'd end up way ahead of the person who leased the car. Leasing can be advantageous, just like renting. It's all about being savvy. Donald Trump's aphorism about leasing depreciating assets and owning appreciating assets holds true here. However, you just need to be aware that the guys offering the leasing, offering the vehicle, and setting up the deal are all in cahoots. It's all up to the consumer to run the spreadsheet and make their own informed decision. Unfortunately, financial savvy and the time to do that research and thinking is lacking these days. To your third question, dealers make their money like every other retailer - on the margin. You have to realize the assets they're selling are of significantly larger value than the $4 bag of milk at the corner store. It's just like how financial institutions use leverage to deliver huge returns. The profit level scales with the the magnitude of the assets being exchanged. Let's take an extremely simple example. They sell 40 cars a month (new and used), at a fixed price of $23,000 per vehicle (Canadian Average). Total sales revenue is $920,000 a month. If their total profit margin, after all business expenses, is 5%, that's $46,000 in their jeans a month as a business owner, or $552,000 a year on pure sales alone. That ignores sales in value-added products, incremental revenue from fixed ops, and other profit sources. I don't need to tell you that's a fair chunk of coin. Guys like Pattison and other dealers just snowballed their money, buying more dealerships, and more profit. Once these dealer operations conglomerate, they can either stay private like Pattison, or become publicly traded, like Auto Canada (TSX: ACQ !!!) To your second question - If the US/CAN auto industry hadn't been bailed out, it would have been industrial Armageddon. The amount of jobs, people, and related industry lost would have been catastrophic. We're talking multiple millions of jobs, and the Keynesian spin-offs would have have propelled us into an unimaginable depression. I supported the bailout then, I do now. However, that doesn't mean we shouldn't have taken the opportunity to regulate the poo poo out of the market with respect to the financial services side of the auto industry. The FIRE sector and the automotive industry are so tied up in each other, that it poses a systemic risk to national and global economies. If that doesn't call for strict government oversight, I don't know what does.
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Nov 23, 2013 06:00
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FrozenVent posted:Gonna quote this: Edit: Ooops. Wrong thread. Rhobot Mk. II fucked around with this message at 18:47 on Mar 14, 2014 |
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Mar 14, 2014 18:45
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Kalenn Istarion posted:He'll show up as a 'senior advisor' at a law firm or Vice / Deputy Chair at a bank. His job description will be a euphemism for 'Provides access, but totally not in a way which violates lobbying laws'. See Kevin Lynch at BMO for example. Nah. Chairman of a lobbying firm.. That's how Tories roll.
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Mar 19, 2014 02:30
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Throatwarbler posted:What the gently caress is a knob and tube, some kind of plumbing they only have in Toronto? It's a method of electrical wiring in use from the 1890's to the 1930's, using a series of single strand copper wires through porcelain tubes to go through studs and nailed-on knobs to support the wire along long sections. It's completely safe if done correctly (which back in the day, it was because it was a truly laborious process done by electricians), but the disadvantage is that it can cause a fire if you're a moron an put insulation next to it, or any kind of obstruction, or damage it during a renovation. Also, it will burn down your house if you are a double moron and install a fuse in the box that exceeds the capacity of the wire and put too much electrical load on the circuit because the wire will heat up and sag between the knobs and possibly come into contact with flammable building materials. It was the cheaper way to wire a house back then, vs armored cable & conduit, but that changed pretty quick. Some Ontario insurance companies won't write policies on houses with K&T, so it's seen as 'dangerous'.
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Apr 30, 2014 12:49
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FrozenVent posted:Isn't K&T wiring something you HAVE to disclose by law? Nope. You're only required to disclose if it was a grow op or if the defect makes the house dangerous or unfit to live in. Knob and tube is right up there with Poly B plumbing on the list of things a home inspector with an intellectual capacity greater than a cantaloupe will find though. Caveat Emptor, baby.
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Apr 30, 2014 13:01
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mastershakeman posted:What do you mean by this? That the American experience just resulted in people declaring BK to get out of any deficiencies? Most loans in the US are non-recourse, meaning that the loan is secured solely against the asset securing the property, i.e. the house. If the borrower defaults, the lender is limited to foreclosure on the property to recover their money. Hence, many people didn't declare bankruptcy, but simply walked away from the property and left the bank holding the bag. While they'll probably never get a loan again, they're also not liable for the huge negative equity on the property. In Canada, all debt is recourse debt, including mortgages. Even if you walk away from your property and the bank forecloses, you're still liable for the negative equity and they can garnish your wages, seize other assets, etc, to recover this money. Many banks in the US went tits up because people just simply tossed them the keys, and it helped speed the US consumers debt deleveraging and as a consequence, their recovery. Should the same thing happen here in Canada, there's no escaping the mortgage, even if the property is foreclosed on. This means in a real estate crash, people are going to be buried in debt for a great deal longer, and that means they're money is going to useless debt service rather than purchasing goods in the economy, which lowers aggregate demand and torpedoes a recovery.
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Jun 5, 2014 18:35
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Cultural Imperial posted:Or people are spending way beyond their means. But maybe it's because they're loving stupid. 30k for a loving dodge journey? what in tapdancing christ Working at a Chrysler Jeep Dodge Ram dealer group, I see this every day. I advertise all our vehicles on a 96 month term at 4.29% interest. Stupid low payments. No equity? No problem! Negative equity? We'll roll it in! The amount of garbage paper being bought by TD, RBC, and other banks to fund these purchases makes my stomach churn. Sell your bank shares.
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Aug 22, 2014 01:06
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Lexicon posted:Just had a thought: where is the manufacturer's capital for their loans coming from? Presumably not in-house. I work in the retail auto industry, and I've answered this a few times, but there are specific institutions that deal with auto loans. First, you have "the banks". Retail auto lending is held by a separate arm of BMO, TD, and ScotiaBank. They're arms-length from retail banking, but there is exposure. Then you have captive finance companies like Ford Credit and Toyota Financial Services. These are actually lending institutions exclusive to the manufacturer. The last time poo poo hit the fan in auto industry, it was the captive finance companies that went tits up, not the banks that were heavy into auto loans. As mentioned before, 0% or below prime financing is a marketing gimmick for dealers and manufacturers. It's called a sub-vented rate. The cost of borrowing is built into the vehicles pricing. The manufacturer will buy down the rate shown to the consumer with its own cash before approval.
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Oct 23, 2014 19:25
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Kraftwerk posted:My car has a small four year loan on it. I could pay it off in full if I wanted to but it makes a lot more sense to have the loan because of 0% interest. I'm sure the car will last me about 10 years. EvilJoven posted:Any loan with rates at 0% should be dragged out forever. jm20 posted:This probably wasn't a dream. ***posts on internet forum about dumb people financing houses they can't afford** ***still falls for 0% APR trick by paying the cost of borrowing hidden in the invoice cost rather the loan from the bank** ***Thinks they got a deal*** 
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May 15, 2015 23:30
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EvilJoven posted:You think I'm some kind of moron that falls for bullshit like the foursquare sales technique? Do you really want me to answer that question? I'd pay good money to see one of your bills of sale.
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May 15, 2015 23:44
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| # ¿ May 16, 2024 12:40 |
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Pm me the last 8 of the vin i cant even tell what that truck even is. Silverado 1500 2500 3500? Paying cash does not mean a good deal.
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May 16, 2015 00:33
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