8 ms·

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 al

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.

taeric 9y ago
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.
- tanderson92 9y ago
  Not if the auto loan is say 5 years and they're offering 1.5% financing. The 5 year treasury rate is currently 1.76%. So they're losing 26bp of yield for taking on (the albeit limited levels of and partially diversified away) the credit risk?
  - taeric 9y ago
    Again, they bundled it with other loans. Now, it probably isn't as bad as it initially sounds. But, it is more complicated.
    - tanderson92 9y ago
      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.
      - taeric 9y ago
        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.
        tanderson92 9y ago
        You are incorrect and your magic analogy is flawed.
        taeric 9y ago
        Do you have recommended reading or links to an overview of how it actually works?
        eru 9y ago
        A student subscription to the Economist perhaps?
        taeric 9y ago
        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.
        tanderson92 9y ago
        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 https://fred.stlouisfed.org/series/BAMLC0A0CM The spread is always positive, because investors demand extra yield for taking on credit risk.
  - Spooky23 9y ago
    The manufacturer is subsidizing the interest. It's 1.5% + cash payment.
pc86 9y ago
10-15% for the manufacturer. A dealership is not making anywhere near $2,100 profit on a new $14k car.
majormajor 9y ago
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.
- no_wizard 9y ago
  I've always locked in the price and flat-out refused to talk about how I was paying for it until the price was agreed upon. It worked for me, took more time I will say, but I got a good deal on a brand new car that I'll drive for a very, very long time.
  - eru 9y ago
    Why does buying a car in America involve so much (or even any!) negotiation at all? I guess it's a form of price discrimination? I just tried to figure out (via Google) whether it's common in eg Germany---but what I found what mostly only about negotiations for used cars.
    - TomMarius 9y ago
      It's normal in Europe. I've never paid the sticker price for a car.
      - kaybe 9y ago
        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?
        9y ago
gozur88 9y ago
>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.
- LoSboccacc 9y ago
  That's also for tax dodging. Banks don't own money only lends it at risk, maker don't earn money keeping margin low, win win

taeric 9y ago

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.

tanderson92 9y ago
Not if the auto loan is say 5 years and they're offering 1.5% financing. The 5 year treasury rate is currently 1.76%. So they're losing 26bp of yield for taking on (the albeit limited levels of and partially diversified away) the credit risk?
- taeric 9y ago
  Again, they bundled it with other loans. Now, it probably isn't as bad as it initially sounds. But, it is more complicated.
  - tanderson92 9y ago
    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.
    - taeric 9y ago
      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.
      - tanderson92 9y ago
        You are incorrect and your magic analogy is flawed.
        taeric 9y ago
        Do you have recommended reading or links to an overview of how it actually works?
        eru 9y ago
        A student subscription to the Economist perhaps?
        taeric 9y ago
        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.
        tanderson92 9y ago
        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 https://fred.stlouisfed.org/series/BAMLC0A0CM The spread is always positive, because investors demand extra yield for taking on credit risk.
- Spooky23 9y ago
  The manufacturer is subsidizing the interest. It's 1.5% + cash payment.

pc86 9y ago

10-15% for the manufacturer. A dealership is not making anywhere near $2,100 profit on a new $14k car.

majormajor 9y ago

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.

no_wizard 9y ago
I've always locked in the price and flat-out refused to talk about how I was paying for it until the price was agreed upon. It worked for me, took more time I will say, but I got a good deal on a brand new car that I'll drive for a very, very long time.
- eru 9y ago
  Why does buying a car in America involve so much (or even any!) negotiation at all? I guess it's a form of price discrimination? I just tried to figure out (via Google) whether it's common in eg Germany---but what I found what mostly only about negotiations for used cars.
  - TomMarius 9y ago
    It's normal in Europe. I've never paid the sticker price for a car.
    - kaybe 9y ago
      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?
      - 9y ago

gozur88 9y ago

>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.

LoSboccacc 9y ago
That's also for tax dodging. Banks don't own money only lends it at risk, maker don't earn money keeping margin low, win win