Ever see those car dealers that say “buy here pay here” or “show us your paycheck and you’re approved! No credit check required”? They’re everywhere and essentially do provide a valuable service. The business model is based on selling cars, but they also provide financing for people that wouldn’t otherwise be able to afford a car.
But of course, we’ve all learned that whenever there are people that can’t turn anywhere else to get a loan, there will be people that will prey on them. And sure enough it looks like a number of these dealers make extra money by screwing these people over. But to the degree that they do is downright scary.
Imagine you have bad credit and need a car. So you go to the nearest dealership you can walk to from wherever you happen to be living. You see a car for $3,000 you like and the dealer sets you up with it for $1000 down financing the rest. The dealer provides the financing. What you don’t know is that since dealer knows how much you make they set you up with a payment so high there’s no way you’ll be able to make it. So within a few months you fall behind on the payments. The dealer repossesses the car and you’re out all the money you paid into it. The dealer puts the car back on the lot for $3,000 and does it again to the next sucker.
Now there’s nothing wrong with the business model per se. That is: providing financing in house and repoing the car if someone doesn’t make the payments. They’re taking a risk on the customer. But if the business model is actually based screwing over customers to sell the same car over and over, then we have a problem. Especially if that car was only worth $1500 in the first place.
The LA Times researched publicly available information and found some startling information. Dealers were charging interest rates as high as 30% and in some cases selling the same car a half-dozen times or more over a few years. That is the same dealer selling the same exact car because they’ve repossessed it that many times. They’d also repossess the car within a week of a payment being late. The newspaper found that over about 4 years, 1 in 8 licensed used car dealers in California sold at least one car three or more times.
All this is technically legal, if absolutely immoral and disturbing. But at least in California they’re trying to curb the interest rates and the amount of time one is allowed to make a payment before a repo can occur. There’s nothing wrong with a dealer being a lender of last resort for someone that needs a car. And there’s nothing wrong with a little regulation to curb bad behavior.
There would also be nothing wrong with requiring a little education on how to research vehicle value or the car buying process whenever someone gets or renews their license. But all we ever seem to do is treat the symptoms.