When people want to buy a car but do not meet income or credit requirements imposed by banks, things can look bleak. Enter the buy here, pay here car dealer, who promises to put the individual in a car that day. For desperate drivers, this might seem like the only solution. However, it can lead to many problems.
Buy here, pay here dealerships charge interest rates that are nearly double or triple the national average for used auto loans. When a driver has been rejected by a bank, these may not seem that bad. However, falling behind on the expensive monthly payments can eventually lead to loan default. If the financial situation is dire, bankruptcy may follow, resulting in repossession of the vehicle.
The buy here, pay here auto market is growing quickly. CNW Marketing Research reported that almost 2.4 million cars were sold by these dealerships in the U.S. during 2010. Just ten years ago, this figure stood at only 1.3 million. Dealers command top dollar for high-mileage vehicles and finance sales at interest rates that sometimes exceed 30 percent.
These dealers turn a clunker into a money-generator and earn their keep from consumers considered the least creditworthy. Drivers who need a car to get to work will accept nearly any financing terms. The FDIC revealed that buy here, pay here dealers lend $80 billion annually. Average profit margin is close to 40 percent, according to an industry trade group. New car dealers make just half this amount.
Nearly one in four buy here, pay here customers default, many due to the high cost of interest. For the dealer, this is great news, as a repossessed car can quickly be put out for another desperate driver to purchase. Bad credit auto financing is often a less expensive alternative with a much better outcome for the borrower.
