Financing Here, Financing There, Financing Everywhere

With the rise of online price comparison shopping, many sellers have come to appreciate that consumers will purchase a product or service at the lowest possible price offered, with little tolerance to pay a higher price among similarly situated substitutions. Perhaps this has always been the case, but the ubiquity of consumer access to pricing has bludgeoned the ability of some sellers to charge a higher price than other available peer sellers providing the same stuff.

I invoke the Newtonian principle that “for every action, there must be an equal and opposite reaction” to assert that when one source of profit (say, charging higher prices than another nearby) is thwarted, something else gets monetized elsewhere.

If you look at businesses that sell items costing more than a few hundreds or more, the rise of what I’ll call “sticker price parity” has led to these companies to offer in-house financing options and/or entering into some kind of joint venture with a financial institution so that you can purchase the jewelry, heavy equipment, or motor vehicle at a price at a price that incurs 6-22% interest, or whatever the agreed terms may be, in an effort to boost profits. That is why, when you analyze a business like Harley Davidson, you are not just analyzing the sale of motorcycles, but rather ongoing payments and financing for the motorcycles because that is also part of the parent entity when you purchase HOG shares.

Of course, the issue with lending against personal property is that: (1) often times, with the exception of new motor vehicle purchases, the customer base is a bit lower; and (2) in the event that the personal property pledged as collateral needs to be repossessed/revendicated by the lender, it could decrease in value greater than the amount of funds owned and the borrower could be judgment-proof, leading to loss.

These risks are often addressed by higher interest rates charged to the borrowers.

The financing of personal property is worthy of study because it completely alters the net effect of one’s relationship with the goods and services around them.

Why did Toyota rise from $5 per share to $113 per share since 1984, while General Motors went bankrupt over the same time frame? Yes, pension costs of the latter contributed, but Toyota’s lending arm had a much more default rate and when repossession was necessary, recaptured a much higher chunk of value, compared to General Motors.

Look at how all of those GE Capital assets that General Electric sold to various entities are now prospering, as they adequately financed.

Look at Warren Buffett’s extensive banking portfolio at Berkshire Hathaway. What do all the banks he has chosen have in common? They are the best when it comes to lending money for the purchase of personal property.

On the other side, take a look at Lewis Mandell’s 1997 work “Our Vulnerable Youth: The Financial Literacy of American 12th Graders,” when he discovered that almost 85% of high school graduated do not understand the general concept of repossession and only one in five could tell you that 20% interest means that your total debt amount would double in under four years, if unpaid and accumulating.

As far as socioeconomic cultural differences go, understanding the difference between paying interest to the bank and owning assets whose profits are driven by the collection of interest is one of the most useful educational concepts to master, as the daily decisions that flow from this understanding can drastically improve or destroy your life.

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