6 tips if you must buy a vehicle from a buy-here pay-here dealership
November 3, 2011 by Todd Murray · Leave a Comment
The L.A. Times is currently running an investigative series on so-called Buy-Here Pay-Here auto dealerships. The first installment describes the basic business model used by these businesses and identifies a number of the pitfalls of buying a vehicle from them.
A buy-here pay-here dealership is, as the name suggests, a dealership that finances the car loans itself, rather than using banks or finance companies. They market to people with low-income and bad credit that can’t qualify for conventional financing. In return for agreeing to finance borrowers that don’t have access to mainstream credit, the buy-here pay-here dealers drastically inflate the price of their vehicles, charge very high interest rates, agree to payment arrangements that they know you can’t honor, and aggressively repossess the vehicle once it’s in default, keeping all of the money that the borrower has already paid. And once the vehicle is repossessed, they sell it again. And again. Sometimes the same vehicle is repossessed and sold as many as eight times, creating another revenue stream for these business. The L.A. Times succinctly–and accurately–describes the business model as “sign, drive, default, repossess, and resell. The entire Times piece is a fascinating look into this booming industry and is definitely worth your time.
It would be too easy to advise everyone to steer clear of buy-here pay-here dealerships. After all, they do allow people without access to mainstream credit to buy a vehicle. And let’s face it, most people need a vehicle to get to and from work these days. But buying a car from them is very, very risky. Here are some tips if you’re considering buying a car from a buy-here pay-here lot:
Decide whether you really need to buy from them. Obviously, if you’re considering a buy-here pay-here dealership, you’ve decided that you need a vehicle and have been rejected by conventional lenders. But consider whether you would be better off taking the money that you’ve earmarked for a down payment to the buy-here pay-here dealer and instead using it to buy a used car outright from a private party. This would solve your transportation and financing problem, without taking on all of the risks of buying from a buy-here pay-here dealer.
Do your homework on the purchase price. Because the buy-here pay-here dealer knows that you’re desperate, they often inflate the list price well-over the vehicle’s Kelley Blue Book value. The Times story reports about one particular transaction where the purchase price was inflated to double the KBB price. Do your homework and make sure that you are getting a fair price.
Review the interest rate carefully. The Times story tells the story of one person who thought she purchased a car with an APR of 12%, when it actually was 20.3%. Make sure that the APR is actually what the contract says it is. There are a number of online APR calculators that you can use to verify the dealer’s numbers.
Be sure that you can afford the monthly payment. The Times story reports that 1 in 4 buy-here pay-here customers defaults on their loan. And there is ample evidence that the dealer may deliberately agree to a payment plan that they know you can’t afford because they know that they can just repossess your vehicle and sell it again to someone else. So be conservative in your estimates of how much you can afford each month and be sure to plan for emergencies when doing your budget.
Don’t believe what they tell you about re-financing or trading up. As the Times story details, these are often lies to pressure you into the purchase. If something doesn’t feel right to you, walk away.
Don’t expect them to work with you if you fall behind on payments. Their business model is heavily premised on repossessing cars in default and reselling them. So they aren’t going to be interested in working with you if you fall on hard times. They’re just going to repossess and sell the vehicle again. The Times story reports that many buy-here pay-here dealers outfit their vehicles with GPS devices and remote-controlled ignition blockers to allow for easy repossession. Those that don’t often resort to deceptive or very aggressive repossession tactics. In my experience, some of the most dangerous repossession encounters that I’ve heard about were ordered by buy-here pay-here lenders.
A vicious cycle in the used-car business | Los Angeles Times | October 30, 2011
A group of U.S. Congressmen, including Minnesota’s Al Franken, introduced a new bill that would eliminate forced arbitration clauses in employment, consumer, and civil rights contracts. The impetus behind the proposed law appears to be the recent U.S. Supreme Court decision in AT&T v. Concepcion. In Concepcion, consumers sued AT&T for false advertising. Because the value of their case was only $30, it was consolidated into a class action. AT&T tried to stop the lawsuit by activating the mandatory arbitration clause in the service contract, which not only required the case to be heard in a behind-closed-doors private arbitration forum, but also banned class actions altogether. This contractual language was buried in the fine print of the consumers’ contract and, like most consumer contracts, was not negotiable and offered on a take-it-or-leave-it basis. Both lower courts rejected AT&T’s argument and struck down the arbitration clause in the contract as unconscionable because it severely limited the consumers’ rights.
In an already notorious 5-4 decision, the U.S. Supreme Court struck down these lower court decisions. The Court applied the Federal Arbitration Act to uphold the contractual ban on class actions and forced arbitration. Although the FAA was originally passed to ensure that courts enforced commercial arbitration agreements between two companies, the Court’s decision expands the scope of the FAA and effectively allows companies to insulate themselves from liability when they defraud a large number of customers of a relatively small amount of money.
Because the Court’s decision involved interpretation of a federal statute and not the Constitution, it can essentially be overturned through legislation, which is where Franken’s bill comes in. From the press release:
What the Arbitration Fairness Act Does:
- Restores the original intent of the FAA by clarifying the scope of its application.
- Amends the FAA by adding a new chapter invalidating agreements that require the arbitration of employment, consumer, or civil rights disputes made before the dispute arises.
- Restores the rights of workers and consumers to seek justice in our courts.
- Ensures transparency in civil litigation.
- Protects the integrity of the Civil Rights Act, the Equal Pay Act, the Americans with Disabilities Act, and the Age Discrimination in Employment Act, among others.
“Workers and consumers should never be forced to give up their rights to get hired for a job, or to get a cell phone,” said Senator Franken.“I’ve introduced the Arbitration Fairness Act to ensure that workers and consumers have the right to choose arbitration over litigation, instead of being forced into it by corporations.”
Press Release | May 17, 2011
Last December, I posted about a Florida woman who sued a debt collector for contacting her family on Facebook. It turns out that the judge agreed with her and ruled last month that the debt collector could no longer contact her–or her family and friends–on Facebook or any other social-networking site. Click below for all of the details.
Debt collectors must tread lightly on social media | Orlando Sentinel | April 17, 2011 (via Consumerist)
Losing your wallet (or having it stolen) can be a nightmare. Here are 9 steps to take to limit the damage, courtesy of Money Health Central:
1. Call the police. Report the crime.
2. Call the credit card company and debit card banks to report the theft immediately. They can deactivate the cards to prevent further charges. These stolen cards were used within minutes at a nearby drug store for $24, twice at a gas station for $5, and at a convenience store for $59.
3. If you have a joint account holder, call that person to look on the back of the card for the 24-hour telephone number to report stolen cards. Google or call directory assistance. Report the theft immediately!
To see the remaining 6 steps, click through (link below) to the Money Health Central post.
9 Steps To Protecting Yourself When Your Wallet Is Stolen Or Lost | Money Health Central | April 11, 2011
According to a Government Accountability Office report, account protection products offered by credit card companies, such as programs that suspend or cancel the cardholder’s debt if the cardholder loses his job, are basically a rip-off. The GAO study shows that in 2009, consumers spent $2.4 billion (yup, with a “b”) on credit card protection programs, yet only received $0.21 on the dollar back in the form of credit protection benefits. Of course, credit card companies pocketed the rest, some $1.8 billion (again, with a “b”) dollars. Think about this the next time you’re tempted to buy one of these alleged “protection” products.
GAO: Consumers Only Getting $.21 On The Dollar Out Of Credit Card Debt Protection Fees | The Consumerist | March 25, 2011