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Auto loans that bite from "buy here, pay here" lenders

[Oct 31, 2011.]


Regular readers of this blog are likely to know about the risks of arranging auto loans through mainstream car dealerships. Of course, there are plenty of good ones out there, but there are also many that ruthlessly exploit consumers through a whole series of different scams. If you're not aware of these, you can check them out at The Center for Responsible Lending's website.

However, there's a whole category of auto loans that are, in effect, designed from the floor up to exploit consumers. These are so-called "buy here, pay here" (BHPH) loans, and when CNN Money covered them last year, it called the process "bottom-feeding."

Auto loans designed to be predatory

BHPH finance is generally provided by dealers themselves using their own money. And often these dealers see the vehicle as an incidental part of--a necessary evil in--a transaction that primarily exists to maximize the amount of money that can be extracted from the poor, the uncreditworthy and the vulnerable.

For many BHPH dealers, it's a 10-step shabby process from beginning to end:

  1. Acquire clunkers.

  2. Fit each of them with a GPS tracker and a device that can remotely turn off the ignition so that they're easy to repossess.

  3. Attract buyers who are so desperate to own a car they'll buy anything at any price.

  4. Don't put stickers on cars so you can set the prices later on the basis of what individual consumers can pay.

  5. When they arrive on the lot, don't let them browse the stock. Instead, first find out how big their down payment could be and what monthly payments they can afford.

  6. Then tell them they qualify only for the car you most want to get rid of.

  7. Get them to sign agreements for auto loans at ridiculously high rates.

  8. Wait for them to fall behind with the payments (sometimes by as little as a day), and then send in the repo team.

  9. Put the clunker back on the lot for the next sucker.

  10. Sue the original buyers for whatever you can get.

Auto loans that make serious money for lenders

The Los Angeles Times yesterday ran a feature on BHPH dealers that contained some startling statistics sourced from CNW Marketing Research and the Federal Deposit Insurance Corporation:

  • Their profit margins are, on average, close to 40%, which is roughly 100% more than most mainstream dealerships selling new cars.

  • They sold more than 2.3 million cars in 2010, compared with 1.3 million in 2000.

  • There are around 33,000 BHPH lots nationwide. The number of dealerships selling new cars is about 20,000.

  • Their lending tops $80 billion a year.

Auto loans don't have to be that way

Clearly, nobody would buy from a BHPH dealer if they thought they could finance a vehicle elsewhere. But it's likely that many could get a much better deal online, even if they do have checkered credit histories.

If you're thinking of buying a car from one, hold off, at least until you've searched for more competitive quotes for auto loans.


About Author:

Peter Andrew has been writing about -- and for -- business for more than two decades. For the last couple of years, he has found himself increasingly specializing in the U.S. financial sector.

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