Buy Here Pay Here Dealerships

The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.

One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.

The reposession rate is pretty eye-popping--even after the subprime mortgage market has jaded us to high default rates. As one of the industry's founders explains, “This is not the car business. This is the finance business." But the sale of the car is what has helped Buy Here Pay Here dealerships largely elude regulation or enforcement activity. Most states have no special rules for these dealerships, unlike for auto title loans, which several states ban outright.

One argument in favor of the loans is that unlike an auto title loan, Buy Here Pay Here is a purchase transaction, helping a consumer get a car they otherwise perhaps would not own. (Part Three of the LA Times series is a thoughtful exploration of the limited alternatives for car ownership). But with a 1 in 4 default rate, allegations of fraud, and rough repossession practices, the big winner with Buy Here Pay Here turns out to be investors. "The amount of return from these loans you can't get on Wall Street. You can't get it anywhere," said Michael Diaz, national sales manager for Small Dealers Assistance Inc. in Atlanta, which buys loans originated by Buy Here Pay Here dealers. "It's the gift that keeps giving."