A new breed of used car dealerships offering in-house financing, often to people with poor credit, are coming under increasing scrutiny. Dealerships called Buy Here Pay Here lots are becoming known for shady practices in the car business.
Los Angeles Times investigates
An investigative series is currently under way in the Los Angeles Times about the segment of the used car market called Buy Here Pay Here car lots. A Buy Here Pay Here car lot offers in-house financing and caters to people with poor credit. Many also require payments to be made at the dealership.
It is estimated that more than 33,000 BHPH lots are operating nationwide, extending $80 billion annually in auto loans. There are more BHPH lots nationwide than new car lots. However, one in four Buy Here Pay Here customers default on their loans, which can carry interest rates of 20 percent or more. The National Alliance of Buy Here Pay Here Dealers reports that the profits on each car sold average about 38 percent. However, according to the Ft. Worth Star-Telegram, dealers also report taking a loss on up to 30 percent of cars they sell.
Dealers can repossess a car once a customer defaults, then write the loss off on taxes and re-sell the car. Some cars have been re-sold up to eight times.
According to USA Today, some dealers equip cars with GPS units in order to track customers’ movements should they default. Some attach ignition kill-switches, according to the Los Angeles Times. Some dealerships are known to begin the repossession process if a payment is even one day late. The chain Car-Mart, one of the largest BHPH chains in the nation, according to CNN, reported in 2010 that it repossessed about 18 percent of the cars it sold.
One woman in the Los Angeles Times piece was invited to the dealership where she bought a 2007 Ford Fusion to discuss refinancing once she fell behind in payments when she was filing for bankruptcy. Once out of her car, other cars from the dealership boxed hers in and she was told the car was repossessed.
A federal class action suit was brought against an Ohio chain of BHPH dealerships in 2004 for deceptive loan practices. The dealership settled for $21.8 million. Another dealership settled a deceptive practices suit in 2007 with the Kentucky Attorney General’s office for $7.4 million.
However, like any business, stories about when everything goes right rarely get reported. According to the Fort Wayne Journal-Gazette, a BHPH chain found an accounting error where customers were being overcharged. The chain, Preferred Automotive Group Southwest, voluntarily reported itself to the state Attorney General and reached a settlement to reimburse customers.