In this market, the companies handing out loans make money whether you pay them back or not. Agents trick hard-luck, often ill-educated customers into predatory loan terms that are much worse than they agreed to with sky-high interest rates. One quarter of the loans default and lenders seize the property, which is worth far less than the purchase price. Wall Street money sees high profit margins and pours in money. Billions of dollars of oans are bundled together, securitized, rated triple-A by ratings firms, and sold off to hedge fund investors scrambling for yield. That finances more predatory loans and helps keeps the cycle going.
High subprime-housing bubble circa 2006.
But also the subprime car market in 2011, as the Los Angeles Times’s Ken Bensinger is showing in a sweet three-part series on Buy Here Pay Here car lots.
Sunday’s story showed how the BHPH business model incentivizes predatory lending and default:
About 1 in 4 buyers default. In the real estate and credit card industries, that would be bad news. In the world of Buy Here Pay Here, it’s just another avenue for profit: The car can be repossessed and put back on the lot for sale in short order. A new buyer makes a down payment, takes on a high-interest loan and the cycle starts anew.
Provided they don’t get wrecked, these recycled vehicles just keep paying dividends. At some dealerships, cars have been sold and resold over and over — three, four, even eight times apiece, motor vehicle records show.
Default and repossession are so central to the business that many dealers plan on both. They equip cars with hidden GPS devices and remote-control ignition blockers to make the repo man’s work easier.
Many pursue their customers for years after they’ve seized and resold the vehicles. Some keep lawyers on staff, filing dozens of lawsuits each month to recoup unpaid balances and garnish debtors’ wages.
Good times in late capitalism. The finance industry pushed companies to send jobs overseas and gobbled up an increasing share of the national income, hollowing out the middle class and broadening the market for corporatized loan sharking. People don’t have jobs to buy new cars or even regular old used cars, so they can mark up the price on a clunker by half, charge a hefty down payment and usurious interest rates, repo the car, and repeat the cycle up to eight times with the same vehicle. And you have to have a vehicle, don’t you? Poor people are being pushed out to the suburbs by urban gentrification, but to get a job in the suburbs, you have to have a car since public transportation is iffy or nonexistent.
When you go to a Buy Here Pay Here lot, forget about little things like price tags. You know things are bad when a used-car dealer helps people sign up for welfare so he can lend against it:
Rarely are prices displayed on car windshields. Instead, negotiations focus on how much the customer can put down upfront and then pay each month.
Many dealers don’t worry about buyers’ credit scores — knowing they can’t be good — but they almost always insist on long lists of references so they can pressure friends and family when a payment is missed.
They also frequently help customers apply for the earned income tax credit for low-income workers — and then offer a loan against the anticipated refund to use as a down payment. Dealers report a surge in sales in the three months leading up to tax day.
That far-reaching customer service must be a big reason why Bay Area private-equity funds like Altamont Capital Partners and Alpine Investors are pouring money into the sector, by buying companies whole or buying their shares. Also: Poverty Inc. has fat profit margins: 38 percent on average. There’s even a $1.7 billion publicly traded finance company called Credit Acceptance Corporation that does nothing but buy securitized auto loans made elsewhere and lend money to make the loans.
Mr. Besinger's article is rife with errors of fact. Companies like Credit Acceptance Corp. are "subprime lenders" not buy here-pay here dealers. The list of suprime lenders to the automotive retail sales marketplace include other, more recognizable names, such as Wells Fargo, Ally Bank, Ford Motor Credit Co., Capital One, Chase Custom Finance, as well as Credit Unions across the country. More than 50 percent of Americans have credit scores below 600, which pushes them into the subprime marketplace. BHPH customers have credit scores approaching 350. Scores such as this includes: numerous late payments on installment loans, defaults, bankruptcies, repossessions, maxed out credit cards, medical debt and other serious credit issues. BHPH dealers put their own money at risk to provide affordable transportation to millions of Americans. There is no securitization of these types of loans. There are almost no similarities between the securitzation of automotive subprime loans subprime housing loans. CJR would do well to investigate the facts surrounding and industry that has been providing this service to millions of Americans for more than 50 years.
#1 Posted by Concerned Reporter, CJR on Wed 2 Nov 2011 at 09:27 AM
Nice work, Concerned Reporter. You beat me to it. Also ignored here are the necessarily detrimental effects of govt intervention into the market: monetary and regulatory policies and macroeconomic schemes which cause price inflation, kill competition, encourage speculation and fraud, and on. (Programs like "Cash for Clunkers" actually do more harm than good, especially to poorer consumers.) But never mind, for it's intellectually easier and politically safer to go after the small-time, private actor and his "predatory lending." (Oh, and never mind that the chum are jumping into the proverbial shark-tank, which itself is inspected and approved by govt "regulators" for safety and such.)
#2 Posted by Dan A., CJR on Wed 2 Nov 2011 at 10:55 AM
Great post.
#3 Posted by Alex, CJR on Wed 2 Nov 2011 at 11:24 AM
And if your average low-income deadbeat went into a car dealership and got turned down for a car loan, the commies here would be bitching and moaning about the discriminatory lending practices.
The only thing that will make the commies happy is for lenders to lose money - to give money in the form of low interest loans (with high default rates) to "poor" people for free cars, food, housing, etc...
"Somebody else's money".... The commie mantra.
Ryan isn't interested in investigating anything.
He follows links from Dailykos and regurgitates any commie silliness that he can find from his bevy of leftist blithering web outlets.
That's his MO.
#4 Posted by padikiller, CJR on Wed 2 Nov 2011 at 11:53 AM
Years ago I sat in the gigantic office of a time share giant named David Siegel as he told the story of his humble roots. He was a used TV salesman in Miami in the early 1960s. He'd get a broken TV, fix it (or have his professor at an electronics repair class do so) and then sell it in Liberty City for $10 down and $5 or $10 per week. "Most of the time," he said, "I only had $5 or $10 in them."
40 years later, he was still wistful about that business. Yet it collapsed, first when he was called for military service and later when the riots came--his place was burned down. "My customers loved me," Siegel said. Later, his store manager was shot while standing behind the counter.
Siegel went on to make millions selling swampland to midwesterners, Mexicans, and some European naifs. He rolled that into the time share empire he operates today.
All of which to say: 'twas ever thus. It's just an excellent business model, in America, to cater to desperate and ignorant people. You charge them up-front what you, yourself, paid for the item, then any installment payments are gravy. It's perfectly legal and, apparently, gives practitioners a sense of righteousness and charity not available to those in less profitable businesses.
#5 Posted by Edward Ericson Jr., CJR on Wed 2 Nov 2011 at 12:59 PM
Mr. Erickson Jr., what you don't know about the buy here pay here business model is a lot.
There is an underclass in our society, an underclass of people who for a variety of misfortunes and social and political reasons do not have the education, training or wherewithal to have what you have. Companies worth billions of dollars mark them with credit blemishes, because they have not paid the money back that they have borrowed when they agreed to pay it.
In our society, that is a serious negative behavior, which results in punishment in the form of paying higher rates to borrow money because your past behavior indicates you are a greater credit risk. Just ask anyone who ever transferred their account balance over to a credit card with one of those 0 Percent offerings for 12 months. If they make one late payment or go over their credit limit that 0 percent deal translates to 25-28 percent interest, overnight.
Still, despite their credit challenges these people need to get to work, take their children to school or go to the doctor’s office. They need a vehicle, and vehicles cost money.
Thirty years ago a dealer could buy a vehicle for $700, put $300 into it, and sell it to a buy here-pay here customer for $2,995 if they put $1,000 down. Every payment made went to the bottom line. Those days no longer exist, and if anyone tells you they still do, he or she simply doesn’t understand the buy here-pay here business model.
Today, dealers must put up sizeable amounts of capital to secure inventory, recondition it, pay staff and have all the overhead with running a business, including liability and garage insurance. They must then “loan” their customers the money to buy a vehicle. They are putting their own money on the street to provide these customers with affordable transportation. This money comes with a cost associated with it, based on the risk the customer presents. In this segment of the economy nearly 50 percent of the customers do not pay the dealer for the full term of the loan. When a default occurs, cash flow ends for the dealer and the costs begin to mount. The dealer, however, never knows for sure which customer will not pay him, so to make the model work, the dealer must charge a high interest rate.
The question becomes if not for these dealers and lenders willing to accept the risk associated with lending money to these customers, how would they get enough money to buy a vehicle to get around? Government transportation is typically unavailable in many areas and often not practical. Family members may love the person, but are not going to lend them $5,000-$7,000 to buy a vehicle. Friends? I don’t think so. The government provides some citizens with hundreds of dollars a month for Food Stamps, but nothing as yet for Car Stamps. Yes, cars are available from private-party customers, but on the low-end $1,000 to $3,000 vehicle will need work. Repairs are costly. With a dealer, you typically get some warranty and someone to turn to when there are major repairs.
Finally, people are going to do whatever they can to get a car in this country. If it means paying a dealer $80 a week for the freedom and value a car brings to their lives, they will do it. The amount of money financed or the terms mean little. It’s their willingness and ability to make the payment that’s the difference.
People can improve their lives by making timely payments to car dealers. No. 1 they have a car, which allows them to be gainfully employed. Also, most dealers report timely payments to the credit bureaus, which can eventually end their dependence on his type of high-cost financing.
#6 Posted by Concerned Reporter, CJR on Wed 2 Nov 2011 at 01:18 PM
willingness and ability to make the payment that’s the difference.
People can improve their lives by making timely payments to car dealers. No. 1 they have a car, which allows them to be gainfully employed. Also, most dealers report timely payments to the credit bureaus, which can eventually end their dependence on his type of high-cost financing.
#7 Posted by Concerned Reporter, CJR on Wed 2 Nov 2011 at 01:20 PM
You don't get it, Concerned Reporter.
Edward, Ryan and their commie/liberal brethren have determined that your average Joe is too stupid to be in charge of his own finances.
He can't make decisions lest a "predator" latch upon him.
When Joe signs a contract, he shouldn't be held to it. And when a lender gives him money, the lender should expect to lose it. It's only fair.
What we need is the Gubmint to step in and fix everything.
#8 Posted by padikiller, CJR on Wed 2 Nov 2011 at 03:45 PM
Wait, what? You mean to tell me the used car business is shady? Come, now. No one's ever going to believe that.
#9 Posted by JB, CJR on Thu 3 Nov 2011 at 03:21 PM
Rent-to-own housing business is about the same. Excellent career move for savvy and tough people who understand the real estate market, and are willing to do what it takes to enforce contracts. Feels very different to those on the other end of the bargain, particularly when they learn that their "rent" doesn't cover any repairs to the house--which usually happens right after a big flood or when the furnace quits.
But, hey, they made their beds. No sense crying to the gubmint.
#10 Posted by Edward Ericson Jr., CJR on Thu 3 Nov 2011 at 03:26 PM
Blue Hippo.
http://www.killerstartups.com/eCommerce/bluehippo-com-new-computer-no-credit-check
Another totally awesome business proposition relying on desperate suckers.
No fraud there, certainly. No need for any burdensome regulators.
Oh. Wait. http://www.ftc.gov/opa/2008/02/bluehippo.shtm
Well, at least it's not criminal. Right? Right!
#11 Posted by Edward Ericson Jr., CJR on Thu 3 Nov 2011 at 03:31 PM
See?
Edward (like his commie brethren) thinks your average low-income American is too stupid to handle his own finances. They're not "savvy" enough to make their own decisions. Edward should make decisions for them.
Such is the commie disdain for the "poor".
These commies just know that they're smarter than the little people.
Ed... If Americans are too stupid to make binding contracts,why shouldn't they be institutionalized, using your rationale? A few reeducation centers out in the country somewhere would do the trick, right?
The fact of the matter is that low-income people have the right to borrow money to buy cars, and lenders have the right to charge them more interest given the increased risk of default.
Edward and his ilk would have the Gubmint set up some sort of car welfare program and pass the cost of default on to the taxpayers.
Just what we need... Another commie boondoggle.
That'll fix everything. Free cars from the Commie Money Fairy.
#12 Posted by padikiller, CJR on Thu 3 Nov 2011 at 05:21 PM
"Edward (like his commie brethren) thinks your average low-income American is too stupid to handle his own finances. They're not "savvy" enough to make their own decisions. Edward should make decisions for them."
The contracts with consumer credit have been too complex for anybody to understand. They are written for exactly that purpose.
You shouldn't need a lawyer to interpret a credit agreement.
#13 Posted by Thimbles, CJR on Thu 3 Nov 2011 at 07:10 PM
See what I mean?
Thimbles also thinks your average American is a dupe - far too stupid to understand the contracts they create.
They need Thimbles and his commie buddies to make decisions for them.
This is the commie way.
#14 Posted by padikiller, CJR on Thu 3 Nov 2011 at 09:15 PM
I think Padi is off his meds again.
#15 Posted by sergio, CJR on Thu 3 Nov 2011 at 10:24 PM
Are you too stupid to do spinal surgery?
Somethings are so complex, they require expertise to be able to understand and manipulate them. Consumer credit agreements, as of the last couple of decades, have been purposefully made complex and made millions of people into suckers.
"far too stupid to understand the contracts they create"
They didn't create these contracts, you know that. The people who made these contracts loaded them with terms consumers did not understand, terms that have made these people billions of dollars through usury.
But yeah, it's funny how now you're all about "Thimbles thinks you're to dumb to read and comprehend your lawyer riddled credit documents" while just a bit ago you were claiming "You're all too dumb to run a successful business. You need overpaid, short sighted, pointy headed CEOs and executives with MBAs to make money. Commies.". Funny how the need for expertise fades in and out like that.
#16 Posted by Thimbles, CJR on Thu 3 Nov 2011 at 10:36 PM
Let's just nail this down...
What Thimbles, Edward and their commie brethren are saying is that your average American is a "sucker" [using Thimbles' terminology]... Too stupid to voluntarily enter into an enforceable contract on his own to buy a car, to enter into a mortgage, or to bind himself to any other obligation.
What these noble sucker oafs need, according to the commies, is some Uber-commie with some unspecified "expertise" to look after them... To keep them from doing things on their own that the commies think they shouldn't be doing.
We can't have these poor morons deciding things for themselves, after all... Making their own decisions.. Paying the "rich" interest for cars! EGAD!
So what we need is a bunch of commies deciding what these hapless imbeciles can do. It's only fair. And just.
And if either the morons or the lenders give us trouble, we'll just round them up and deal with them as necessary at gunpoint. A little reeducation, and all will be well.
And that will fix everything.
#17 Posted by padikiller, CJR on Thu 3 Nov 2011 at 11:43 PM
Hey CJR, when does boring, repetitive commenting cross the line into spam?
#18 Posted by Thimbles, CJR on Fri 4 Nov 2011 at 10:49 AM
Thimbles wonders: Hey CJR, when does boring, repetitive commenting cross the line into spam?
padikiller responds: LOL... When you post the exact same comment on three threads... Like you just did.
I'd like for you to explain why you believe that the "suckers" (your word, not mine) that you believe to be too stupid to be permitted to buy used cars on their own are also smart enough in your opinion to run a country?
HUH?
Commie/liberals hate free expression. Their nonsense can't suffer the slightest scrutiny, and they know it. This is why the first thing commies do is to silence the opposition.
#19 Posted by padikiller, CJR on Fri 4 Nov 2011 at 12:09 PM
Hey CJR? Just out of curiosity, when does boring, repetitive commenting cross the line into spam?
#20 Posted by Thimbles, CJR on Fri 4 Nov 2011 at 01:51 PM
If people are too stupid to be allowed to sign contracts for used cars...
And too stupid to be allowed to decide whether or not they need health insurance...
And too stupid to sign their own mortgages....
Why should we let them vote?
It's a fair question.
#21 Posted by padikiller, CJR on Fri 4 Nov 2011 at 05:22 PM
Hey CJR? Not to be a bother, but when does boring, repetitive commenting cross the line into spam?
#22 Posted by Thimbles, CJR on Fri 4 Nov 2011 at 05:44 PM
No, it's a stupid question.
We let people (even those as dim as Padfoot) vote because it's a constitutional right.
#23 Posted by Jerrejerrod, CJR on Fri 4 Nov 2011 at 08:56 PM