Socking It to Poor People Who Need Cars

November 3rd, 2011

L.A. Times car writer Ken Bensinger has done a fascinating three-part investigative series on “Buy Here Pay Here” car dealers. These dudes will get you into a clunker with a lot of miles on it, charge way over book value for the car, and finance it for you at maybe 20+ percent, depending on what they determine you can afford.

Is it gouging or a legitimate business? A needed service for those who have blown their credit? For the low-income worker who desperately needs a car to get to his or her job? Or a scam to make easy money from people in distress?

This type of business is called Buy Here Pay Here because many want their payments in cash, on the lot, every two weeks, promptly. If and when you miss a payment or default, the car is quickly repo’d and then resold to the next person in need.

In fact, these businesses are not so much car dealers as car financiers, and many admit the business is less about cars than collections. They buy generally high-mileage cars at auction, mark them up double or more, demand substantial down payments, and resell them over and over when the buyer defaults—as 25-30 percent of them do.

Buy Here Pay Here graphsThe profits are enormous, around 38 percent per car sold. Investors, even one of Warren Buffett’s portfolio managers, are getting in the game. Bensinger says, “In the last two years, investors have bought more than $15 billion in subprime auto securities.” BHPH dealers make $80 billion in loans each year. They sold nearly 2.4 million cars last year.

And all these subprime loans are now being securitized and packaged for investors. Is this sounding like a replay of the subprime mortgage crisis? Things haven’t reached that pitch yet, but some are issuing warnings. Because the economy is so tough for so many people, BHPH chains like America’s Car-Mart are thriving. States have varying authority, or none, to control BHPH.

Dealers offer no apologies and in fact maintain they provide a valuable service to folks in need. They claim to teach them financial discipline. Yet, one in four poor U.S. families is without a car—a serious handicap for the millions without mass transit. And they have very little recourse, as Bensinger demonstrates.

The Department of Transportation has a total budget of about $75 billion for next year, with none of it allocated to help poor people get cars. Cash for Clunkers in 2009 junked nearly 700,000 running vehicles—cars that should have been given to poor people.

We want to stress that while their numbers are growing, BHPH dealers are still in the minority compared to the honest used-car lots and new-car dealerships. CarGurus gives its readers the opportunity to submit and read dealer reviews to be sure which ones are honest and fair.

But it’s a classic case of “find a need and fill it,” isn’t it? Car-Mart’s shares are up about 23 percent this year.

So, are BHPH dealerships unfair scams on poor people or legitimate businesses?

—jgoods

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  1. Michael De Candia
    June 10th, 2012 at 20:46 | #1

    As the poor die off, because we are distroyed, the middle class is next, then the rich will eat each other,or distroy each other, the working class have not received any raise in wages for 20 years now, instead of giving everybody higher wages, the rich owners cut wages further and give themselves large bonuses, the government likes this because they get big taxes from the owner who robs everything from all the poor,
    Instead all the poor and working people should be paid more and then we all share in the paying of tax burden of the country, the way it is going the rich man will get all the money and have to pay all the taxes, in the end,

  2. Randy
    November 4th, 2011 at 16:08 | #2

    What else is new? A major part of the American economy involves feeding on poor people, from pawn shops and loan mills to payday loans to furniture rent to own stores to car dealers, refinance outfits, employment agencies… the list is almost endless. Victimizing poor people (and now the middle class via mortgage companies and banks) is THE AMERICAN WAY.

  3. jgoods
    November 3rd, 2011 at 15:35 | #3

    @ panayoti
    Thank you for these thoughts. I could not agree more. We are indeed investing in poverty, and the get-rich-off-the-poor schemes like this only multiply in a bad economy. The government seems to protect the winners and ignore the losers.

  4. panayoti
    November 3rd, 2011 at 14:59 | #4

    Probably both. The tragedy here is the sad state of our economy and the hardships that it creates for genuinely poor people. We are all guilty of thinking at some time that there really aren’t that many poor people who are struggling mightily with financial issues. Truth be told these people do exist and most of the media chooses not to cover their plight. Kudos to the L.A. writer who bothered to expose the difficulties faced by so many desperate people.

    Pay day schemes like these have been around for quite a while and for many, are an alternative to selling illegal drugs instead. I am appalled to see that we are now “investing’ in poverty instead of infrastructure, energy, and education. The only good thing that I see here is that the “investing” is done by private means rather than government.

    Poverty has been around since time immemorial and other than the “Great Society” programs of the 60s and 70s, poverty continues. Those programs worked largely because of our unchallenged wealth and world dominance but in the long term, failed miserably. There are so many reasons for the poverty that discussing them here would be counterproductive. Briefly, people must be educated and given experiences that are meaningful for their continued self sustenance. The question here is who will fund that kind of “investing”??

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