11 Feb

As I was doing some research for another article I am writing, I ran across 3 different articles about why people with damaged credit who were looking for a vehicle should avoid buying from a Buy Here – Pay Here dealership. I was amazed at some of the reasons they cited. It reminded me of some of the misinformation that was taken for fact during the debate on the 3 bills introduced to regulate the BHPH industry in California late last year. And, frankly, it made me a little angry.

I have compiled 6 of the “facts” listed in these articles. Here they are:

1. The buyer/borrower can expect to pay in excess of 30% interest at a BHPH lot.

There are, of course, still dealers out there who charge the maximum rate allowable in their state but they are a minority. Various sources list the average interest rate at BHPH dealers slightly above or below 20% APR. Compare this with the average interest rate for all Deep Subprime (FICA score below 549) loans of 17.9% and Subprime (FICO scores of 550 – 619) at 14.4%. Because BHPH dealers lend their own money to people who generally can obtain any other financing, 20% seems fairly reasonable.

Many dealers charge far less than 20%. The average at industry giant America’s Car Mart through April of last year was 14.4%. Many dealers charge rates from 12.9% to 17.9%. For more information on establishing an interest rate for your dealership, read this blog post.

2. Further, the dealer will try to get a down payment that is close to what he paid for the car. In other words, the down payment will cover the majority of the cost of the car. The payments and interest paid by the borrower are primarily profits to the BHPH dealer.

This is just old information. When Buy Here – Pay Here was first established in the 1950s, the typical business model was to require a down payment equal or close to the total inventory cost of the vehicles. However, the dramatic rise in wholesale vehicle prices coupled with the limited budgets of the average BHPH customer rendered this nearly impossible decades ago.

The interest collected rarely represents any substantial profit to the dealer. Interest collected is used to offset bad debt charge-offs. The risk assumed by the BHPH dealer is high and repossessions and charge-offs are a part of this business.

3. There may not be any warranty for breakdowns or expensive repairs. If the dealer includes a warranty, it may come with conditions such as a high deductible. If money is tight for the borrower, paying for repairs and continuing to make payments becomes very difficult.

OK, these statements are literally true. However, the writers imply that warranties are rare and, when problems arise, the customer is left on their own to figure it out. This just isn’t true at most BHPH dealerships today.

More and more dealers are offering some kind of warranty with the vehicles they sell and many more have optional service contracts available. Products such as these that are specifically designed for BHPH dealers and the vehicles they sell continue to be more readily available at more reasonable cost. Competition alone continues to expand the number of dealers offering some kind of mechanical protection to their customers.

One of the single, most universal truths of the BHPH business is that, “When the car stops running, the customer stops paying”. BHPH dealers have been aware of this since the dawn of the industry. Most dealers will work with customers in the event of a breakdown to get the vehicle repaired and keep a good customer in the car and paying.

4. A late payment can result in extra charges or repossession. There can be late charges, immediate repossession or termination of the contract.

This one is also true but the implication is that BHPH dealers do this while banks and finance companies don’t and that is just not true. Any financial institution can, and does, add late fees, accelerate contracts and repossess collateral for delinquency and default on the contract.

Most of the articles I looked at also implied that BHPH dealers did these things as part of their business plan and at a far higher rate than other lenders. That is not accurate, either. There are many BHPH dealers who do not charge additional fees for late payments. They believe that having a late fee that applies after a certain period establishes a grace period in the customer’s mind and don’t want to create that impression. Most dealers who do not charge late fees also understand that it is difficult enough to get their principal and interest payments from customers with limited economic means, much less trying to get addition fees from those limited budgets. We’ll address repossessions in the next point.

5. BHPH dealers use a standard operating model to turn a car over five times a year. That’s why it’s hard to determine the size of this market, except that it is growing.

There are still a limited number of dealers who practice “churning”, that is, repossessing cars quickly and reselling them numerous times. This is one of the practices cited most often as one of the reasons the BHPH needed regulation during the debate over the 3 bills introduced in California. The issue is that the articles I read and the arguments in California declared that this practice was common, even a standard practice in the industry. This just isn’t true and even the worst offenders would have a hard time reselling the same vehicle 5 times in 12 months.

Most reputable BHPH dealers understand that their goal is to help each customer get to the end of their loan and pay it off. Most dealers understand that it is better to work with a customer who is trying and willing to work with the dealership than to repossess vehicles too quickly. It doesn’t happen with every deal but repossession should be a last option, not the first move a dealer makes with a delinquent customer.

6. The BHPH auto industry is not regulated and doesn’t commonly report its sales or payment history to outside sources

Unregulated ??? This one almost made me laugh. Here is a short list of some of the laws and regulations BHPH dealers must comply with:

  • State & Federal Unfair & Deceptive Practices laws
  • State Usury laws
  • The Truth in Lending Act
  • The Fair & Accurate Credit Transaction Act
  • The Used Car Rule
  • The Privacy Rule
  • The Safeguards Rule
  • The Disposal Rule
  • The Red Flags Rule
  • The Risk Based Pricing Rule
  • The Fair Debt Collections Practices Act
  • and many more

As far as reporting payment history to outside sources, more BHPH dealers now report to the credit bureaus than ever before in the history of the business. Reporting to the bureaus is quickly becoming a standard for the industry, not an exception.

The Buy Here – Pay Here industry has long lived under a black cloud. These misconceptions represent just a few of the ones that have damaged the reputation of an industry that provides a valuable service to our communities and the segment of the population that we serve. Industry organizations such as the National Alliance of Buy Here Pay Here Dealers and the National Independent Automobile Dealer Association have and continue to work hard to overcome this stigma. It is important we all do whatever we can to shine the spotlight on the best and brightest in our industry and highlight the positives.