Buy Here Pay Here Used Car Dealers Rip Off Consumers
Buy Here Pay Here used car dealers prey on people who cannot buy a car because their credit scores are very low. Most of these people need a car. The Buy Here Pay Here car dealers do not use outside lenders to finance car sales; instead, they finance in-house. When a person buys a car, he or she agrees to make payments to the car dealer.
The problem is that these dealers have tremendous opportunities to take advantage of their vulnerable customers. They charge interest rates on the financing of 30% or more. They markup the vehicles, which are usually one step from the junkyard, of 100% or more.
The dealers do not care if the buyers default as they often do given the high prices of the cars and sky-high interest rates. When buyers miss a payment, the dealers repo the car and sell it to the next guy keeping the prior buyer's down payment and monthly payments.
A Los Angeles Times reporter has written a fine report on this predatory business. He reports that Wall Street investors are putting money into such dealerships and even securitizing the car loans.
I am representing a buyer in a lawsuit against Autoville Motors in Sacramento, which is one of the Buy Here Pay Here dealers.
The reporter traced the history of one car sold eight times by the same Pay Here dealer.
In a second article, reporter Ken Bensinger of the LA Times, describes used car dealer J.D. Byrider, one of the Buy Here Pay Here dealers, this one in Visalia, CA. J.D. Byrider is a chain of 135 dealerships that a private equity firm bought for $50 million. Sales by Byrider were $740 million last year. J.D. Byrider's customers are folks who need cars who can't qualify for loans from finance companies and banks. One in four of their customers default setting up repossessions in the thousands. The dealerships make an average profit of 38% on each sale, which is a huge number in the car business.
There is even a national associations of these dealers, the National Alliance of Buy Here Pay Here Dealers. The group has a lobbying arm, euphemistically named the Community Auto Finance Association.
Some payday lending firms are moving into this predatory business according to the LA Times article.
In a move parallel to the subprime mortgage disaster, the car loans are being bundled into securities and sold to investors. The bundles have been rated investment grade according to the article. One reason this may be accurate is that when a buyer defaults, the dealer gets the car back and repays the loan. The dealer then sells the same car to someone else for about the same price as the price to the previous buyer. In contrast, in the new car business, when a car is repossessed, it sells for a steep discount as a used car.
