You see the signs all over the place. “BUY HERE PAY HERE!” “NO CREDIT CHECK!!” “APPROVED!!” “BAD CREDIT OK!!” This is an awesome deal for people with poor credit, such as people just out of a Bankruptcy case, right? These companies provide a good service and help people rebuild their financial lives and give them a way to get to and from work, right? Wrong! At the risk of painting with a broad brush, these dealers “get you” at every stage of the deal, from before you set foot on the lot until they get paid in full or they take the car and sell it to someone else. Lets take a look at the process of most Buy Here/Pay Here car lots.
First, what are they? In short, they are car dealers who both sell you the car and loan you the money to buy it. This is unlike most other new and used car dealers who will use separate financing companies, even if you apply for the loan at the dealership. How can they offer such “great deals?” It starts before customers even get to the lot. They generally stock their lots with inexpensive cars bought at auctions, or their own repos. They might spend a little money on reconditioning and making it look good, and make minimum repairs to keep the car running. They then put the car on the lot for double what they paid for it. After all, they already know their customers cannot afford to shop around at other dealers for better deals because they can’t qualify for a loan. They get as much cash as they can for a down payment and finance the rest at 24-30% annual interest. At this point, the dealer may have a significant part of what it has in the car back in its pocket in the form of a down payment, the first month’s payment, and any add on fees, even before the car leaves the lot.
If all payments are made, the dealer makes a huge profit on both the sales price and the financing. If, at some point, the customer misses or is late with a payment (and there is a high default rate for these businesses), the dealer is very quick to repossess. Many “subprime” dealers now use devices that allow them to automatically shut down and track the location of the vehicles they have financed. Unlike other finance companies or lenders who really do not want your car, these dealers do want your car back. Depending on state law, a customer might miss a payment one day and the car is repossessed and back on the lot for sale a couple days later …. and the customer still owes money! Keep in mind as well that these are not new or “certified” used cars with warranties – they are used auction cars that are not checked out, and they break down. When you buy the car, you are responsible for the repairs.
Of course, state and federal laws concerning the regulation of dealers and financing control some aspects of the transactions. I understand that there are probably “good” or “better” Buy Here/Pay Here dealers, or at least ones that try to be more reputable than the others. However, the reality is that the business model of selling and financing older and cheaper used cars with no credit check and much higher default rates does not lend itself to normal or traditional methods of doing business.
Other reading:
Lenders Get Into Buy Here/Pay Here Business.
Clark Howard’s Tips on Buying A Used Car.
Myths of Buy Here/Pay Here Dealers.
More Myths, A Response from a Dealer.