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Buy Here Pay Here Dealerships

posted by Katie Porter

The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.

One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.

The reposession rate is pretty eye-popping--even after the subprime mortgage market has jaded us to high default rates. As one of the industry's founders explains, “This is not the car business. This is the finance business." But the sale of the car is what has helped Buy Here Pay Here dealerships largely elude regulation or enforcement activity. Most states have no special rules for these dealerships, unlike for auto title loans, which several states ban outright.

One argument in favor of the loans is that unlike an auto title loan, Buy Here Pay Here is a purchase transaction, helping a consumer get a car they otherwise perhaps would not own. (Part Three of the LA Times series is a thoughtful exploration of the limited alternatives for car ownership). But with a 1 in 4 default rate, allegations of fraud, and rough repossession practices, the big winner with Buy Here Pay Here turns out to be investors. "The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."


For whatever it is worth, I report new data about title loan repo rates in this new paper. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1952084 For the most part, the available data suggests that the repo rates are a lot lower than people have previously estimated.

I had this discussion with my second cousin who had been in the buy here pay here vehicle biz for 30 years. What he told me blew me away! He told me that those businesses were multimillion dollar businesses. He told me that the down payment usually asked of the debtors was typically enough to cover the costs of the dealers purchase and that everything else (the payments) was profit! (not counting the expense of the brick and mortar of the facility)

Flash forward a year later we recently filed BKs for a number of those businesses. One in particular I found extremely interesting. The debtor apparently didn't have to put up any of his own dough to get the cars on his lot. Instead he sold them on a "type" of consignment from someone who bought in bulk associated with an auto auction. Taking 15%-25% on the sale. Try explaining that to a Trustee! Well the fact that they are not assets of the estate per se..

Until just recently (last 2 years) for some reason if the debtor needed a vehicle while in a 13 these were the only dealers willing to finance them. Not true anymore! Credit Unions have been on a rampage financing debtors who are in the middle of their 13s (Locally).

It's a mess for sure. Tote lots or beater lots, another name for them, have been both a problem and a help to people that otherwise can't get transportation but need to get to work.

Just had a reader question today that seems to typify what I see. Seems the girlfriend financed the BHPH car in her name since the boyfriend had such bad credit. And to no surprise, she got a bad deal on the car as well. See getoutofdebt.org/33489/

I've known guys involved in similar setups going back 30 years and they've always been a money maker, but so is the used furniture business, rent to own, payday, etc.

Until we can resolve how financially disadvantaged consumers can get a leg up to start climbing the ladder, an outright ban on all of these easy to abuse solutions is not the best approach.

The LA Times has a follow-up piece on car leases as a lucrative alternative to buy here/pay here.

These type of lots started decades ago. I know of an guy who started selling to waitresses in the 60's. Because their income was mostly tips, they couldn't obtain traditional credit to buy a car. They also didn't often have a bank account. Thus, it made more sense for them to stop buy the lot to make their payment. Mailing a check was not an option.

Yes, the rate of return can be quite high, but so is the risk. But there is nothing inherently wrong with them. The financial part of these transactions are subject to state law. In Ohio, one of those laws is the Retail Installment Sales Act, which caps interest rates (still a staggering 25%) and prohibits certain practices. It is not a completely unregulated business.

One alternative for some of these customers is to save up a bit more cash and buy the best car they can get for cash from a private party. One of the consumers featured in the third LAT story plunked $4000 down. That's definitely enough to get a good car with careful shopping. Used cars being much more reliable, overall, than they were 15-20 years ago, it's possible to get a roadworthy car for even less. I did it for years even when I could afford to spend more, but chose not to. The first time I ever paid more than $5000 for my car was 2009.

It does help to have some know-how about which models are the best ones to look for and how to evaluate a particular car (big hint, look for boring American cars like Buick LeSabres that depreciated fast and often had elderly first owners). Not every consumer knows how to do that. But it's a skill that can be learned -- and taught.

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