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.
The 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?