Will Buy-Here-Pay-Here Car Dealers Get Kicked Off the Gravy Train?
June 4, 2012
(Long Island, N.Y.) One of the most profitable segments of the auto market is the Buy-Here-Pay-Here (BHPH) lot. And current economic conditions have been a huge windfall for these dealers, which especially target low-income consumers. In many locations the BHPH dealer, who typically carries his own financing, is exempt from banking regulations designed to protect consumers from predatory lending practices. Since the typical BHPH shopper has subprime credit, most believe they are unable to obtain credit elsewhere. When they finally find a “friendly” dealer willing to finance them, they jump at the chance, despite overpriced cars, predatory interest rates, special “fees”, and questionable business practices.
However, two emerging trends may threaten the traditional BHPH model. Several bills are pending in California which attempt to bring BHPH lots in line with protective consumer standards for traditional lenders, set a basic warranty standard, require disclosure of a vehicle’s actual value, and prevent electronic disabling devices without the buyer’s written consent. Over 100 non-profit organizations are offering credit-challenged consumers throughout the U.S. financing with interest rates as low as eight percent.
Consumer horror stories about BHPH practices range from deceptive advertising, such as $88 monthly payments to the lot that is “nice” for two years when the consumer gets behind, only to repossess the car three months before it would be paid off. Up to forty percent of BHPH customers end up defaulting on their loan.
According to Milwaukee-based Ways to Work, over 70% of their buyers report an increase in pay once they have dependable transportation to get to work. Ways to Work requires clients to obtain credit counseling, and offers interest rates as low as eight percent. According Jeff Faulkner, president of Ways to Work, the organization’s default rate is only ten percent.
The Internet is also affecting the “Buy Here Pay Here” model. With many online lenders offering pre-approval even for consumers with bad credit, the corner BHPH lot is no longer the only alternative. Other online services pre-qualify consumers and then direct them to a dealer in their “network.”
While the National Independent Automotive Dealer’s Association asserts that the California laws, if passed, would cost the state millions of dollars in sales tax revenue by making purchases “unavailable,” the consumer’s best protection is to thoroughly research before buying. The most important thing to check is the dealer’s reputation, followed closely by the car itself. Use CarFax to check out the vehicle’s history, and have your purchase agreement subject to the car passing inspection by a mechanic of your choice.
Business models change with the times. In an era where consumer protection is a major issue, BHPH dealers may want to adjust some aspects of their business model before the government and nonprofits change it for them.