Lindsay Beyerstein has a great catch in an article at Hillman Foundation website — car loans designed especially for the no-credit desperate types who need a vehicle to keep a job.
The car "dealer" is also the lender, and it's a perfect scam. The worse your credit, the better the deal for the lender, since the car is then repo'ed and resold, often many times.
The business is called "Buy Here Pay Here" used car dealerships, and they're a first cousin to payday lenders. Beyerstein (my emphasis):
[T]he Buy Here Pay Here business model [is] sign, drive, default, repossess, and resell.Preying on the desperate is profitable, says Beyerstein; the average "dealership" makes 38%. The cars are outfitted especially for this business; they "come standard with hidden GPS trackers and remote ignition locks for easy repo." Sweet. (Maybe they could design a car that drives itself back to the lot at the push of a button. That would cut down on the night crew.)
Faced with the choice between getting hosed buy a used car dealer and sleeping on the street, buyers will pay any price and accept financing on any terms. The dealers know it. Cars are priced above their Blue Book value and financed at an average interest rate of 20.7%, triple the national average.
Buy Here Pay Here dealerships are only nominally selling cars. Their real business is financing. And because they write their own loans, they are exempt from most forms of regulation. The "Pay Here" part of the name indicates that the buyer delivers payments in cash to the dealership.
And guess what? Wall Street is starting to repackage these loans as derivatives — just in time for Christmas. As the economy worsens, the market for no-credit car loans is bound to soar. What better gift for the union pension fund that has everything (else) — shares in a made-to-fail car loan package. (And what better product for the banks to bet against with those ever handy Credit Default Swaps? All you need is a dumb-enough counterparty.)
Beyerstein's article is based on an excellent series of stories running in the LA Times and written by Ken Bensinger. Part 1 is here, with a link to Part 2 at the bottom.
A stunning read, and an excellent catch by Beyerstein. This is something to watch out for; it has "scandal waiting to happen" written all over it.
GP
