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Old 26-08-2014, 16:27   #16
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Re: Allowance During Boat Purchase

Certeza-
Every market is different but in case you haven't heard, there are investigations going on now about the sub-prime auto loan market. Sure, some folks will get that low rate and others will pay more than double that. But just as the banks caught hell for giving mortgages to people who could never pay them, they are now about to get a second round of hell because apparently a lot of car loans are being given out with the intent of repossessing cars.

A slightly used car is, after all, easily sold. Boats? Not so easy, new or used. And even in the car market, you don't find loans being given for more than the sale price of the car. The old "we'll make the first payment for you" business just means the sale price is being discounted, you won't get 100% financing no matter how nicely you ask.

Even if they're looking to repossess the car from you.
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Old 26-08-2014, 17:08   #17
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Re: Allowance During Boat Purchase

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Originally Posted by hellosailor View Post
Certeza-
Every market is different but in case you haven't heard, there are investigations going on now about the sub-prime auto loan market. Sure, some folks will get that low rate and others will pay more than double that. But just as the banks caught hell for giving mortgages to people who could never pay them, they are now about to get a second round of hell because apparently a lot of car loans are being given out with the intent of repossessing cars.

A slightly used car is, after all, easily sold. Boats? Not so easy, new or used. And even in the car market, you don't find loans being given for more than the sale price of the car. The old "we'll make the first payment for you" business just means the sale price is being discounted, you won't get 100% financing no matter how nicely you ask.

Even if they're looking to repossess the car from you.
My ex-wife is going through this right now. 1 year old Ford Escape has been in the shop 4 times. She has broken down on the freeway multiple times.

Now she wants to dump the car. The dealer wants to put her in another new car. First loan is underwater. They'll roll it all together into a new (bigger) loan.

And it's not just Ford. The Toyota dealer will do the same thing.

Interesting they both want some additional cash, like $2,000, but I htink this is just a token.

My advice, of course, is to keep the current car and ride it out. The dealer has always taken car of the issues. Free tow, loaner car, fix under warranty.

The devil you know so to speak. but she never took my advice while we were married so...
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Old 26-08-2014, 17:19   #18
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Allowance During Boat Purchase

I admit I'm stupid, but why would anyone sell a car knowing they were going to have to re-possess it?
I know thats done on used cars that are overpriced. Some of the used car dealers around here even have Lo-jack or some other tracking system so they know where to go get the car.
I had assumed they made money by getting the persons tax refund check as down payment, but how do you make money doing that with a new car? Surely the initial depreciation is huge?
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Old 26-08-2014, 17:40   #19
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Re: Allowance During Boat Purchase

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I admit I'm stupid, but why would anyone sell a car knowing they were going to have to re-possess it?
I know thats done on used cars that are overpriced. Some of the used car dealers around here even have Lo-jack or some other tracking system so they know where to go get the car.
I had assumed they made money by getting the persons tax refund check as down payment, but how do you make money doing that with a new car? Surely the initial depreciation is huge?
Uhhh. Because auto salesmen work on commission? Because dealers get incentives? Because loan originators are punching a clock? Because 90% of the cities in the USA are commuter unfriendly? Because manufacturers get bailouts?

Pick your reasons.

Oh and here is a big one. My ex got the car "fully loaded" i.e. they stuffed her with all kinds of dealer add ons. The markup on these is huge. All rolled onto the loan.

Arguably the "loan" is underwater but once back on the used car lot the cycle repeats with a lower asking price.
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Old 26-08-2014, 18:04   #20
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Re: Allowance During Boat Purchase

OK, I said I was stupid, but now I think I get it. Basically I make a bad loan, but I get paid and the financier gets the short end of the stick? I can see that, that makes sense.
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Old 26-08-2014, 18:33   #21
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Re: Allowance During Boat Purchase

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Originally Posted by hellosailor View Post
Certeza-
Every market is different but in case you haven't heard, there are investigations going on now about the sub-prime auto loan market. Sure, some folks will get that low rate and others will pay more than double that. But just as the banks caught hell for giving mortgages to people who could never pay them, they are now about to get a second round of hell because apparently a lot of car loans are being given out with the intent of repossessing cars.

A slightly used car is, after all, easily sold. Boats? Not so easy, new or used. And even in the car market, you don't find loans being given for more than the sale price of the car. The old "we'll make the first payment for you" business just means the sale price is being discounted, you won't get 100% financing no matter how nicely you ask.

Even if they're looking to repossess the car from you.
Well, sort of. Banks didn't originally get in trouble for loaning more than the homes we worth. They got in trouble for lending more than the borrower could reasonably pay back. You are referencing the latter as support for a point about the former.

Admittedly, in the housing market some regs got piled on during the fiasco to "protect" unwary buyers, but by and large a bank can still lend as much as they want to lend for any asset. The predatory lending standards don't dictate LTV as much as they dictate ability to pay. You can still literally go anywhere and finance a car for more than it's worth. This will not get a bank in trouble. Giving you a loan for a $100K car when you only make $20K annual will do it though.
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Old 26-08-2014, 18:36   #22
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Re: Allowance During Boat Purchase

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I admit I'm stupid, but why would anyone sell a car knowing they were going to have to re-possess it?
I know thats done on used cars that are overpriced. Some of the used car dealers around here even have Lo-jack or some other tracking system so they know where to go get the car.
I had assumed they made money by getting the persons tax refund check as down payment, but how do you make money doing that with a new car? Surely the initial depreciation is huge?
The risk of repossession is built into the rate across the universe of borrowers. The most enlightening thing about the crisis was that people literally stop every other debt payment before defaulting on their car. It makes sense. Credit cards have no collateral. If you lose your house you can always find a place to rent. But if you lose your car, how are you going to get to work. As was mentioned, the vast majority of USA is commuter unfriendly, and the average auto commute is around 30 minutes. Lose your car, lose your income for most people.
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Old 26-08-2014, 22:05   #23
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Re: Allowance During Boat Purchase

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The risk of repossession is built into the rate across the universe of borrowers.
Yes and no. As long as the system is "stable" the merry go round continues.

The loan is outta the dealer the day it is written. The dealer is already paid, the salesman got his commission, the loan originator got his paycheck on Friday.

The financial institute/bank or whatever is holding the paper... for now. They will sell it to someone at a discount who will package it into a 10 year paper made up of thousands of loans and the retirement plans of the dealer, the salesman and the finance guy will buy it to fund their retirements.

Some loans within the tranch will fail some won't. When too many fail then...

Remember all that government bailout money? Yup - your tax dollars go to work.

Welcome to America...

People buying stuff they can't afford with money they don't have...
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Old 27-08-2014, 10:30   #24
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Re: Allowance During Boat Purchase

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Yes and no. As long as the system is "stable" the merry go round continues.

The loan is outta the dealer the day it is written. The dealer is already paid, the salesman got his commission, the loan originator got his paycheck on Friday.

The financial institute/bank or whatever is holding the paper... for now. They will sell it to someone at a discount who will package it into a 10 year paper made up of thousands of loans and the retirement plans of the dealer, the salesman and the finance guy will buy it to fund their retirements.

Some loans within the tranch will fail some won't. When too many fail then...

Remember all that government bailout money? Yup - your tax dollars go to work.

Welcome to America...

People buying stuff they can't afford with money they don't have...
OK... "theoretically" the rate is set properly. Actually, when it gets down to the nitty gritty... During certain periods of history, the risk metrics have been woefully inadequate, for such a highly levered system.

It's fairly easy to find stats articles mentioning a phenomenon wherein a 6 sigma event (about 1 in 500MM) actually happens on the frequency of a 4 sigma event (about 1 in 15,000). That is an easy statement to make, and people seem to understand it, but they don't seem to understand the flaw in that statement. By definition, if an unlikely event is occurring with much higher frequency, it is no longer a rare event. Sure, a 6 sigma event that would be expected once every 1.5 million years could happen tomorrow and still remain 6 sigma. It would just be unlucky. If it happens tomorrow and then again 4 years from now, it would constitute astronomically bad luck. 3 times in 25 years is virtually impossible.

Just to name a few of the biggest US crises; 1837, 1873, 1907, 1929, 1980s, 1998, 2008... When 'rare' statistical events happen on that frequency, it becomes obvious that the stats used to measure risk are inadequate. That and we've entered the realm of moral hazard and the failure is deliberate. My contention is that if we removed the moral hazard, rates would be much higher and crises much more rare. But even the first step in removing the hazard would result in a massive de-leveraging in the market and a depression like we've never seen or heard about.

In the mean time, you can still borrow more than a good is worth. You can still get an absurd 30-year loan on a property. And you can still rack up unsecured debt that would be nearly impossible to pay off during a normal working career.
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Old 27-08-2014, 16:55   #25
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Re: Allowance During Boat Purchase

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OK... "theoretically" the rate is set properly. Actually, when it gets down to the nitty gritty... During certain periods of history, the risk metrics have been woefully inadequate, for such a highly levered system.

It's fairly easy to find stats articles mentioning a phenomenon wherein a 6 sigma event (about 1 in 500MM) actually happens on the frequency of a 4 sigma event (about 1 in 15,000).
.
I get your point but to be precise Six Sigma is 3.4 defects per million opportunities.

The key is how you measure and what you measure. For example I could measure loan originations that go into default in the first year. This would be a measure of the quality of my loans.

This isn't to be confused with the causes of the loan defaults which could be many.
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Old 27-08-2014, 19:19   #26
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Re: Allowance During Boat Purchase

Geek alert!!! Once you start counting Sigmas, I'd suggest moving to the Nasdaq forum ;-)

Seems to me the benefit of financing the $50k in order to invest won't reap enough to offset the hassle.


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Old 29-08-2014, 14:17   #27
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Re: Allowance During Boat Purchase

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I get your point but to be precise Six Sigma is 3.4 defects per million opportunities.

The key is how you measure and what you measure. For example I could measure loan originations that go into default in the first year. This would be a measure of the quality of my loans.

This isn't to be confused with the causes of the loan defaults which could be many.
Of course you're right. 6 sig = ~99.99996% = ~4/1,000,000

Not sure where in my brain the other number came from or if it was a typo while thinking two things at once. Anyway, you're correct. I believe that the reason for default doesn't matter at all if the stats accurately reflect the true prob of default. Assuming the population is large enough. The problem is that while the body of the distribution is precisely defined, the tail risk definitions are obviously inadequate. Some type of Pareto tail modifier would probably fix most of the issue, but it still doesn't change the fact that the system currently discourages the more accurate risk estimates. Which I think was more to your original point. Until that changes, we will continue to have a crisis every 10-20 years, and the lenders will continue to cry ignorance as to why these 6 sig events keep happening so frequently.
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Old 29-08-2014, 14:24   #28
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Re: Allowance During Boat Purchase

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Geek alert!!! Once you start counting Sigmas, I'd suggest moving to the Nasdaq forum ;-)

Seems to me the benefit of financing the $50k in order to invest won't reap enough to offset the hassle.


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First point well taken! I'll try to get back out of geek territory.

To your second point, it is all in how you view your opportunity cost. Hypothetically, imagine your annual return on the $50K was 50%. Would it be worth the hassle to finance it?
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Old 29-08-2014, 14:33   #29
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Re: Allowance During Boat Purchase

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Rates are supposed to be reflective of loan risk, but I can get an auto loan for 2.8% and must pay 4.5% on a home.
Rates reflect more than just risk. In this case, the rate is also likely to reflect the term of the loan. If you (or the bank) believes that interest rates will be higher in the future, they will be unlikely to want to commit their money long-term at a low rate. This is why the avergage 15yr fixed home rate is 3.17%, but the 30yr fixed home rate is nearly a percent higher at 4.06%.

Home loans can be any term, but are usually 15 or 30 yrs. Auto loans are usually 3-5 and rarely more than 7 yrs because the longevity of vehicles is not that long (they are mostly depreciated within the first few years, anyway). Boats are somewhere in the middle, but closer to autos in depreciation and loan-term.
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Old 29-08-2014, 16:59   #30
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Re: Allowance During Boat Purchase

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Rates reflect more than just risk. In this case, the rate is also likely to reflect the term of the loan. If you (or the bank) believes that interest rates will be higher in the future, they will be unlikely to want to commit their money long-term at a low rate. This is why the avergage 15yr fixed home rate is 3.17%, but the 30yr fixed home rate is nearly a percent higher at 4.06%.

Home loans can be any term, but are usually 15 or 30 yrs. Auto loans are usually 3-5 and rarely more than 7 yrs because the longevity of vehicles is not that long (they are mostly depreciated within the first few years, anyway). Boats are somewhere in the middle, but closer to autos in depreciation and loan-term.
I've heard of everything from 5-20years for yachts, depending on the vessel. Just as with auto, newer boats seem more likely to get the longer term. I'll be looking at boats no older than 4 years and anywhere from $300-500K.

I've always found this interesting, given that the new vessels depreciate much faster than the fixed payments can reduce the principal. So the lender is essentially granting extended loan terms for a vessel that is far more likely to be upside down. Makes sense that boat lenders want at least 20% down, but auto lender these days are typically 0% down on an auto loan that is literally going to be underwater the moment the owner takes possession.
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