Cash-strapped consumers flock to Buy Here, Pay Here used car dealerships when their credit stinks, they need a car, and they don’t want to wait. But a recent L.A. Times article blows the lid off how these dealers target vulnerable, low-income consumers who eventually default on their loans.
Once they’ve got you on their lots, dealers can sell cars for twice their actual value or jack up the interest rates on the loans they so “generously” offer consumers with bad credit.
About one in four buyers will eventually default on their car loans, the Times reported. The dealership is then free to repossess their car and throw it back on the lot to be sold to the next sucker to wander into their trap.
To be sure that sucker isn’t you, we hit up senior consumer finance advisor Philip Reed, who provides great tips for car-buyers at Edmunds.com.
'Personal references are very important in this area,' Reed says. 'I recommend getting as much information as you can about a dealership in advance.'
If your pals aren't giving you any leads, the FTC recommends hitting up the Better Business Bureau or your state's Attorney General to see if a business has been flagged for complaints.
'People want to go for a higher level of car than they can afford at the time,' Reed says, but shooting for a car that's beyond your financial reach could wind up costing you big. Assess your finances and calculate how much you can afford to pay monthly on a car.
In addition to the car value, you should know your credit score and the current average interest rate on used cars, Reed says.
In the L.A. Times article, a dealer talked a couple with bad credit into putting $1,000 down for a 2003 Mitsubishi and paying an interest rate of 25.99%.
Consumers with low credit scores know they won't qualify for a decent loan, so they turn to Buy Here, Pay Here lots because the dealers offer financing on-site. But dealers tack on outrageously high interest rates for loans and set their own payment schedules.
And expecting the dealer to tell you your financing options is a big no-no, Reed says.
'First of all, you're trapped,' he says. 'You have no leverage in terms of comparing payments or any other kind of offer unless you want to make calls on your cell phone while you're there.'
Compare the dealer's loan offers with other businesses first, and be wary of ads targeting consumers with bad credit or that promise financing.
Check out the Federal Trade Commission's guide on buying a used car for more information about financing options.
To avoid any cash-draining surprises down the road, ask for an inspection of any car before you open your wallet, Reed says.
If a report isn't available, it's perfectly OK to request an inspection--you'll just have to pay for it yourself. Ask friends for referrals for a good mechanic or check the Yellow Pages, the FTC advises.
Apps for buying a used car are pretty ubiquitous. Plus, if you can whip out your smartphone and show a shady dealer he just lied about the true value of a clunker, then you've got negotiation firepower in the palm of your hand.
VIN Hunter lets you punch in the Vehicle Identification Number (every car's calling card), track its history, and compare prices. Also try Black Book iUsed Car, Edmunds, or Kelly Blue Book.
In the article, Nou Lee signed a loan contract on a used car that said she would pay a 12% interest rate. But when she started getting bills, she realised her interest payments reflected a rate nearly double what she expected.
'Do the maths,' Reed says. 'Since (interest payments) are spread out over time, people don't realise how much the interest really is.'
Ahead of time, calculate your payments at various rates of interest so you'll have an idea of what the exact dollar figure is before you sit down to hash out a loan contract with your dealer.
Bor Pha trusted her dealer's assurance that she would only pay 12% on a loan. But she found out too late that she was actually paying more than 20% in interest per month.
No matter what a dealer tells you, it only counts if it's written in black and white.
'Don't rely on spoken promises,' the FTC says. 'They're difficult to enforce because there may not be a way to a court to determine with any confidence what was said.'
Dealers are on the lookout for vulnerable consumers who may be ignorant of their rights as a buyer and they're pros at sniffing them out, Reed says.
When Tiffany Lee fell behind on her used car payments, she was led to believe the dealer would be kind enough to work with her to make her loan more affordable, the L.A. Times reported.
But the minute Lee set foot on the lot, the car was repossessed before she knew what hit her.
'The whole mindset of the dealer, whether it's a legitimate dealer or any one of these fly-by-night predatory dealers, is to get the consumer on the lot,' Reed cautions. 'They have free things they give away, and they advertise that it's a $25 gift value and the thing is a little piece of junk.'