Some Used Car Lots Target Those With Bad Credit
ROBERT SIEGEL, HOST:
For many Americans, a car is not a luxury. It's the necessary factor that balances a complex equation of work and family, commuting, shopping, dropping off kids. But a car is a big ticket item. Like a house, it's something we buy with borrowed money.
As the Los Angeles Times reports this week, if your credit is shot and you have to buy a car and borrow to buy one, you may find yourself at the mercy of a business that is part used car lot and part predatory lender. It's called a Buy Here Pay Here used car dealership.
Ken Bensinger has written the L.A. Times three-part series and joins us now. Welcome to the program.
KEN BENSINGER: Thank you very much, Robert.
SIEGEL: And, first, what's the difference between these buy here pay here dealerships and a typical used car lot?
BENSINGER: Well, they don't look typically very different. But the main difference is that other dealers might use an outside lender like a bank. These guys don't. Buy Here Pay Here dealers are the bank. They produce their own financing and that allows them to make loans to people with bad credit that no one else will touch.
SIEGEL: How common are these dealerships?
BENSINGER: They're very common. There's actually about three of them for every new car dealer - every two new car dealers in the country. About 30,000 more or less around the country.
SIEGEL: But you write about people who were getting loans that when you work them out on paper turn out to be over 29 percent interest. As companies that lend, aren't they regulated by somebody who regulates lending?
BENSINGER: They are, and actually many of them have their own attorneys to make sure they follow the letter of the law. Many states will allow interest rates as high as 35 percent or more. And there are some states that don't even have caps on interest rates.
SIEGEL: Now, you describe several customers who desperately needed a car. And the truth is the only place they'd be able buy one would be at one of these Buy Here Pay Here dealerships.
BENSINGER: Yeah. Some of them would have an option to buy a car from Craigslist or something like that, a private party sale. But in reality, many people show up with not very much money for a down payment. They might have $500, for example. Dealers will often help them increase a down payment by doing their taxes for them. The dealers will have tax refund anticipation loans, kind of like H&R Block does, on the lot. And they'll use the expected refund as part of the down payment.
That works in particular because of the Earned Income Credit, a federal tax credit for people who are working families with low wages. Dealers in the industry love that credit because it goes to selling cars for them. These dealers do about 40 percent of their annual sales in the two months before tax day.
SIEGEL: The rate of delinquency, though, on these car loans is much higher than it is for most used cars.
BENSINGER: Oh, it's day and night. The rate of delinquency is about 25 percent. And the default rate - that is that they stop paying altogether and the dealer takes the car back - is between 25 and 30 percent.
SIEGEL: Well, what's in it for somebody selling a used car to finance the purchase of an automobile when there's such strong likelihood that the buyer will stop paying, eventually stop paying altogether?
BENSINGER: Well, it's twofold. One, these dealers purchase their cars at a low price and they mark them up quite a bit, and get fairly large down payments considering the true value of the car. Their customer has no bargaining power, and thus the dealer can charge whatever price they wish. We frequently see markups of 200 percent or more on these cars.
And the second factor is that even if the customer defaults, the dealer is not out of options. Unlike a bank repossessing a home when it has to sell it at a loss, these dealers can take a car they repossess and put it back in their lot and sell it again, and frequently get the same price or even higher in some instances the second time around. In fact, in reporting this, I discovered that some cars are sold multiple times, as many as eight times by the same dealer.
SIEGEL: You quote the dealers as saying, "Hey, we're a source of financial discipline for these people and we're their only chance to get wheels."
BENSINGER: And, you know, it's sad to say but there's some truth to that. One of the things I look at in this series is whether there are alternatives. And the truth is, there are very limited alternatives. There are some charities and some religious groups that help people get cars. But the number of cars they can give out in a year might reach 20,000 maybe, nationwide.
The Buy Here Pay Here industry sells about 2.4 million cars nationwide. So, you get a sense that - and for many people it is the only option. It's the only thing filling this need. And so, dealers actually start to believe that they are altruists of a nature.
SIEGEL: Ken Bensinger, thank you very much for talking with us.
BENSINGER: It was my pleasure. Thank you.
SIEGEL: Ken Bensinger is a business investigative reporter for the Los Angeles Times.
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