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  1. #1
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    America's next big rip-off: Cars are the next sub-prime crisis!

    Here's another good article about a possible sub-prime crisis in the auto industry. It appears the banks are being pushed into offering sub-prime car loans because of the money involved. These auto-loan backed securities could very well bust with the government again having to bail out the banks.

    So what does this have to do with being carfree? Well I posted another video from Dave Ramsey where he states he'll ride a bicycle than take out a car loan! LOL!


    http:America?s next big rip-off: Cars are the next subprime crisis! - Salon.com
    US Auto Lending Stands At $783B, Up 15% From Last Year; Average Monthly Payment For A New Car Is $459


  2. #2
    Pedaled too far. Artkansas's Avatar
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    The basis of the sub-prime was the belief that real-estate would continue to grow in value. Cars are known to depreciate.
    "He who serves all, best serves himself" Jack London

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    Sophomoric Member Roody's Avatar
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    I don't know who Dave Ramsay is, but apparently one of the lucky few who has cash to pay for a new car.


    "Think Outside the Cage"

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    Sophomoric Member Roody's Avatar
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    Quote Originally Posted by Artkansas View Post
    The basis of the sub-prime was the belief that real-estate would continue to grow in value. Cars are known to depreciate.
    Yes, and also car loans are secured by the car itself. It's a lot easier to repossess a car than to foreclose on a house. They can sell the same car over and over if necessary. It might be a ripoff of the consumers, but not much of a risk to the finance companies.


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    Senior Member Dave Cutter's Avatar
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    I think the basis of the sub-prime mortgage collapse was..... banks were forced (by federal law) to make loans to a portion of the public who could not possibly repay the loans.

    Ramsey is implying that the banks (though new banking regulations) have been forced into the same sub-prime leading procedures for automobiles... (that had caused the mortgage collapse). So once again... we will have bank failures too extensive to not bail-out/save.

    I think I heard of this in other venues. Right now... prime borrowers can get 5 years (60 month) car loans.... at ZERO interest (with car vendors picking up the fees). So a sub-prime car loan may be 4 or 5 percent... still very low by historical standards. But the problem is.... maybe 1 in 5 cars being returned to the banks worth far less than what the banks have invested in it.

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    Quote Originally Posted by Dave Cutter View Post
    I think the basis of the sub-prime mortgage collapse was..... banks were forced (by federal law) to make loans to a portion of the public who could not possibly repay the loans.
    I'm not sure how to put this delicately, but you don't know what you're talking about. Sub-prime loans were precisely the loans that lenders were NOT required to make to any "portion of the public".

    Perhaps you got your news/analysis of the Lesser Depression from an entertainment network. When we undid the regulations that prevented an encore performance of the Great Depression for fifty years, we shouldn't have been at all surprised that the banksters would do their best to bring on the show. The S&L crash of the '80s was just the opening act of this deregulation nightmare that has caused a lot of suffering, none of it to the banksters themselves, of course.

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    Quote Originally Posted by Dave Cutter View Post
    I think the basis of the sub-prime mortgage collapse was..... banks were forced (by federal law) to make loans to a portion of the public who could not possibly repay the loans.

    Ramsey is implying that the banks (though new banking regulations) have been forced into the same sub-prime leading procedures for automobiles... (that had caused the mortgage collapse). So once again... we will have bank failures too extensive to not bail-out/save.

    I think I heard of this in other venues. Right now... prime borrowers can get 5 years (60 month) car loans.... at ZERO interest (with car vendors picking up the fees). So a sub-prime car loan may be 4 or 5 percent... still very low by historical standards. But the problem is.... maybe 1 in 5 cars being returned to the banks worth far less than what the banks have invested in it.
    Did you listen to Ramsey's video diatribe? His argument is exactly the opposite - that the subprime borrower has to pay excessive interest rates (he states 15% up to 24% [I have my doubts about his figures - but my wife did pay 23.5% on her first car many years ago.]) and that therefore the people stay broke and the banks get rich. The article referenced in the OP also talks about the lenders charging excessive interest. That may be true, but if it is then it isn't likely to cause a repeat of the financial industry problem with housing where they were losing money - not making too much.

  8. #8
    covered in cat fur katsrevenge's Avatar
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    Quote Originally Posted by Roody View Post
    I don't know who Dave Ramsay is, but apparently one of the lucky few who has cash to pay for a new car.
    If you buy used, paying cash is doable. I've owned a few cars, between me and my guy, and we've always done cash deals.

    ..when I'm doing the talking, cash also means we can knock a few hundred off too. My guy just pays; he's not into negotiation.
    Just one of those dirty pinko commies some people worry about.

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    Senior Member yote223's Avatar
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    I make it a point to NEVER pay interest on anything that depreciates. That's why I pay cash for good quality low mileage vehicles. Saving to pay cash takes discipline. Sadly, too many people have never learned this fact. This is why we carry such a high debt burden in this country which does nothing but drag everyone down with it. JM.02W.
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    Super Moderator no1mad's Avatar
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    Quote Originally Posted by Roody View Post
    I don't know who Dave Ramsay is, but apparently one of the lucky few who has cash to pay for a new car.
    Dave Ramsay is to personal finance as Dr. Phil is (was?) to personal relationships.
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  11. #11
    Sophomoric Member Roody's Avatar
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    Quote Originally Posted by no1mad View Post
    Dave Ramsay is to personal finance as Dr. Phil is (was?) to personal relationships.
    Ah, a big phony blowhard.


    "Think Outside the Cage"

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    Sophomoric Member Roody's Avatar
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    Quote Originally Posted by yote223 View Post
    I make it a point to NEVER pay interest on anything that depreciates. That's why I pay cash for good quality low mileage vehicles. Saving to pay cash takes discipline. Sadly, too many people have never learned this fact. This is why we carry such a high debt burden in this country which does nothing but drag everyone down with it. JM.02W.
    A good way to do that is to diligently put aside a two or three hundred dollars every month to "pre-finance" the car you will buy when your current car buys the farm. This will always be difficult for poorly disciplined people, but is also hard for people with low incomes. When you're poor, there is always some true emergency that will drain your savings.

    I'm not sure why these personal finance gurus never hit on the solution of simply not buying any cars at all. I know the carfree option isn't going to work for everybody, but everybody should at least seriously think about it. There's a lot more to it than "riding a freaking bike" as Ramsey put it.


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  13. #13
    Senior Member wahoonc's Avatar
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    Dave Ramsey is a financial advisor that goes against the stream and preaches paying cash over credit.

    I too pay cash for my cars, seldom buy new. I buy 2-5 year old vehicles, gently used with low miles, as well as a documented maintenance and repair history. We then keep them for 10+ years. The last vehicle we purchased new was my wife's 2003 F150, it was an end of the model year deal and we got a very deep discount. She is still driving it. Currently has somewhere over 200,000 miles on it. Probably will get replaced in the next year or so. The truck will go into semi-retirement as a farm truck, replacing an even older Chevy we currently use.

    What Dave Ramsey is talking about is more of a predatory lending practice. Kind of like the payday loans, where they charge outrageous interest fees. I realize that loaning anything is a risk and some loans are riskier than others. Unfortunately in many parts of the US having a car is the only way to be able to survive, it is a vicious circle. Until people educate themselves and figure out some way to break the vicious circle it will continue. Also unfortunately it is people at the bottom end of the economic scale that are being abused by the system.

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    Senior Member Dave Cutter's Avatar
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    Quote Originally Posted by B. Carfree View Post
    I'm not sure how to put this delicately, but you don't know what you're talking about. Sub-prime loans were precisely the loans that lenders were NOT required to make to any "portion of the public".
    No I am not mistaken. But I am sure you are politically invested in believing otherwise. I know it is popular to believe some awful things about bankers (as did those in the occupy movement). But in real life.... banks have been highly regulated for decades. Redline laws slashed mortgage profits even back when I was in banking.

    I am not a big fan of Ramsey. But he makes a great point to the largest part of "his audience"... which isn't everyone. "Riding a freaking bike"... as he put it could be a great way to set aside enough money for a decent start (or re-start) in life. Or even a great way (for some) people to live.

    Unfortunately... as Ramsey pointed out... only about 16% of new car sales are cash. He should have pointed out that 90% of the cash sales are also higher-end automobiles. It's just throwing money away.

  15. #15
    Senior Member Dave Cutter's Avatar
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    Quote Originally Posted by wahoonc View Post
    Dave Ramsey is a financial advisor that goes against the stream and preaches paying cash over credit.
    Aaron
    So... do you know financial advisors that recommend having debt? The very job of financial advisor is building wealth... not debt.

  16. #16
    Sophomoric Member Roody's Avatar
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    Quote Originally Posted by wahoonc View Post
    Dave Ramsey is a financial advisor that goes against the stream and preaches paying cash over credit.

    I too pay cash for my cars, seldom buy new. I buy 2-5 year old vehicles, gently used with low miles, as well as a documented maintenance and repair history. We then keep them for 10+ years. The last vehicle we purchased new was my wife's 2003 F150, it was an end of the model year deal and we got a very deep discount. She is still driving it. Currently has somewhere over 200,000 miles on it. Probably will get replaced in the next year or so. The truck will go into semi-retirement as a farm truck, replacing an even older Chevy we currently use.

    What Dave Ramsey is talking about is more of a predatory lending practice. Kind of like the payday loans, where they charge outrageous interest fees. I realize that loaning anything is a risk and some loans are riskier than others. Unfortunately in many parts of the US having a car is the only way to be able to survive, it is a vicious circle. Until people educate themselves and figure out some way to break the vicious circle it will continue. Also unfortunately it is people at the bottom end of the economic scale that are being abused by the system.

    Aaron
    I agree. I see my own family running this credit rat race, especially for their car. It's holding back the family as an economic unit. But when I try to explain this they look at me like I'm from a foreign country.

    The banks and car finance companies do sell those cars over and over again after repossessing them. And now they are bundling car loans together and selling them like they do with mortgages, as a way of hedging their bets. I don't think that's necessarily a bad thing, as long as somebody is watching over it. These car finance companies are even less well regulated than the banks. IMO, capitalism works only if it's very closely regulated.

    As far as I know, this isn't a new problem, but maybe it's worse now because both family incomes are lower and car prices are higher.

    This was the problem that credit unions were supposed to take care of by providing safe and affordable loans for working class people. I love my credit union, but would rather loan out more of the assets instead of tying them up in fancy new facilities.


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  17. #17
    Senior Member dynodonn's Avatar
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    The subprime debacle was the result of the large influx of money pouring in from Asia, the banks had to put it to work to pay the interest,even if it meant relaxing the safeguards put in place years ago to stave off a financial crisis. I'm glad that we bought a home under the older lending standards, though my wife and I were put through the wringer, there was no question on being able to make the loan payments, even during the leanest of times.

    One thing about cars, the average car costs far less than the average home, and with a shorter payment period.

  18. #18
    Senior Member Spld cyclist's Avatar
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    Quote Originally Posted by Dave Cutter View Post
    No I am not mistaken. But I am sure you are politically invested in believing otherwise. I know it is popular to believe some awful things about bankers (as did those in the occupy movement). But in real life.... banks have been highly regulated for decades. Redline laws slashed mortgage profits even back when I was in banking.
    No, really. This mortgage crisis was created by the private sector, not the government. No bank was forced to loan to anyone.

    Banks especially weren't required to give loans to people with low or no documentation of their income and debts. Yet many banks did so, giving mortgages to people who were poor credit risks. They even gave mortgages to people who they knew to be poor credit risks. Why? Because they knew that they would be able to immediately sell those loans to other banks, so there was little or no risk to the mortgage originators.

    The big banks aggregated individual mortgages into large investment funds and then sold them as shares to other investors. The big banks were able to hide the risks of those investments because the private bond rating agencies certified them as being safe, even though they weren't. (They started off being pretty safe and had high yields. As more and more money flowed into these investments, banks bought more and more mortgages and asked fewer and fewer questions about the quality of those mortgages. Eventually the whole thing blew up when we hit a recession and foreclosures increased above a critical level).

  19. #19
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    Quote Originally Posted by Dave Cutter View Post
    No I am not mistaken.
    You most certainly are. You may want to read into the practices of the banks and lending institutions in the period right before "the sub-prime crash".

    Spld cyclist did a nice job of quickly summarizing it.

  20. #20
    Freewheelin' Joe Perez's Avatar
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    Quote Originally Posted by Roody View Post
    I don't know who Dave Ramsay is, but apparently one of the lucky few who has cash to pay for a new car.
    This really stuck out at me.

    I don't consider myself to be especially wealthy. I'm not hurting financially, though I'm certainly in no position to be buying a house, spending money on exotic luxuries such as cruises, expensive CF bikes, etc.

    At present, I am completely car-free. This is by choice, rather than by necessity. I live in Hoboken, NJ and work in Manhattan, so a combination of bicycling and trains satisfies 100% of my transportation needs.

    That said, I only recently made this change (about 7 months now), prior to which I'd always lived in suburban areas outside major cities, and always owned at least one car at any give time. And, with the exception of the very first new car that I bought in 2000 shortly after graduating from college, I have never taken out a loan to buy one.

    The idea of taking on debt to buy a car strikes me as abhorrent. While I do acknowledge that there are a few people who genuinely cannot afford to pay cash for a car while simultaneously having a legitimate need for one, I find it difficult to believe that these people constitute a majority of the public in general, or even of the public in North America.

    I do personally know a lot of people who take on debt to purchase new cars because they feel some emotional need to own one. As I said, I made this mistake myself once years ago. But it's one I'll never repeat. And quite frankly, if you don't have $5-10k in spare change rolling around to buy a decent used car, then you're doing something really wrong.

    [/judgementalism]

  21. #21
    rugged individualist wphamilton's Avatar
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    Quote Originally Posted by Spld cyclist View Post
    No, really. This mortgage crisis was created by the private sector, not the government. No bank was forced to loan to anyone.

    Banks especially weren't required to give loans to people with low or no documentation of their income and debts. Yet many banks did so, giving mortgages to people who were poor credit risks. They even gave mortgages to people who they knew to be poor credit risks. Why? Because they knew that they would be able to immediately sell those loans to other banks, so there was little or no risk to the mortgage originators.

    The big banks aggregated individual mortgages into large investment funds and then sold them as shares to other investors. The big banks were able to hide the risks of those investments because the private bond rating agencies certified them as being safe, even though they weren't. (They started off being pretty safe and had high yields. As more and more money flowed into these investments, banks bought more and more mortgages and asked fewer and fewer questions about the quality of those mortgages. Eventually the whole thing blew up when we hit a recession and foreclosures increased above a critical level).
    Exactly right. And these bundled mortgages were so profitable initially, especially with the housing bubble, that no one really cared about the fraudulent ratings and fraudulent lending. Bundled mortgages were in such demand from Wall Street that the lenders couldn't keep up, and so began the sub-prime lending. There was no "required" necessary - lenders were making huge profits and competed to make these loans.

    Making it possible by removing regulations in the late 90's was the initial proximate cause of all of it.

    I don't worry about a financial crash from auto loans because of the difference in magnitude if nothing else. But I am concerned with the bundling of these high-risk loans into securities given the large depreciation of the collateral, and the lending is largely unregulated. We're just repeating the same mistakes, on a smaller scale in a slightly different venue.

  22. #22
    Senior Member Dave Cutter's Avatar
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    Quote Originally Posted by Jared. View Post
    You most certainly are. You may want to read into the practices of the banks and lending institutions in the period right before "the sub-prime crash".
    Read? My God man... I like about a million other people.... WORKED, earned, and lived in the industry. We read plenty... we took classes on the government regulations forced on the banking industry. The ability to sell other (non-traditional) products was a result of lobbying government in a effort to stay alive. Some products... were completely phony. THAT was the bubble... that caused the collapse.

  23. #23
    Senior Member FenderTL5's Avatar
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    Quote Originally Posted by Joe Perez View Post
    ..quite frankly, if you don't have $5-10k in spare change rolling around to buy a decent used car, then you're doing something really wrong.
    [/judgementalism]
    Do you seriously believe that?
    Nashville, like L.A. without a tan.

  24. #24
    Senior Member RPK79's Avatar
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    Quote Originally Posted by Roody View Post
    I don't know who Dave Ramsay is, but apparently one of the lucky few who has cash to pay for a new car.
    I've listened to him a few times when the local station carried his weekend radio show. I don't think he would ever recommend to anyone to buy a new car.

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    Freewheelin' Joe Perez's Avatar
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    Quote Originally Posted by FenderTL5 View Post
    Do you seriously believe that?
    I do seriously believe that a person ought to have at least $5-10k in liquid cash sitting in the bank at all times. A great deal more than that, actually, but that's an amount which is reasonable to set aside for the purchase of a used car if one foresees that need in the near future.

    As to whether a majority of westerners actually do have this amount of money available is something I really can't answer, as the only information I have to go on here is speculative / hearsay in nature. My suspicion is that this varies greatly by nationality.

    And yes, I believe that if you've managed to get to, say, age 30 or so (a purely arbitrary number picked just now) without having started to accumulate a bit of a rainy-day fund, that you are doing something wrong.

    If you disagree (meaning that you think it's perfectly acceptable to have less than $5k in liquid cash, and that being flat broke is an indication that you're doing everything right,) then I'd be quite curious to hear your perspectives on both retirement planning and goal-setting with regard to career management.


    Saving up $10k in the bank is exactly the same as taking out a loan for $10k and then paying it back over time, except that you plan ahead for it and it costs less in the long run. If you can do one, then you can do the other.

    The idea that it is both normal and acceptable to go into debt to buy a car, if indeed this is a widespread definition of "normal and acceptable," is an indicator of a social problem much more complex than is likely beneficial to explore in this forum.

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