The Next Investment Bubble…Used-Car Loans

Monday, November 07, 2011
Big-money investors have found a hot new business to get behind: so-called “Buy Here Pay Here” used-car dealerships.
 
Such dealerships feed off desperate consumers who can’t get financing for cars, selling them older, high-mileage vehicles at inflated prices and offering loans with interest rates that are triple that of regular used-car loans. The term “Buy Here Pay Here” is derived from the fact that many of the dealers require borrowers to make their payments at the lot.
 
These dealerships are making an average profit of 38% on each sale, which is more than double the profit margin enjoyed by conventional retail car chains. That’s why investor groups are pouring money into buy-here-pay-here operations, even if they do have a buyer default rate of about 25%.
 
“The amount of return from these loans you can’t get on Wall Street. You can’t get it anywhere,” Michael Diaz, national sales manager for Atlanta-based Small Dealers Assistance Inc., which buys buy-here-pay-here loans, told The Los Angeles Times. “It’s the gift that keeps giving.”
 
Now investment companies are buying these subprime car loans, bundling them into securities and, after getting credit rating firms to give them top-of-the-line AAA ratings, selling them to investors…to the tune of $15 billion worth over the past two years. If this scheme sounds familiar, it’s because that is exactly how the subprime housing market that led to the current financial crisis worked. Once again, short-term profit vultures are pushing loans to lower-income Americans, throwing them into a pool and, with the help of compliant ratings agencies, marketing them to banks, insurance companies and mutual funds.
 
Some Buy Here Pay Here dealers create their own securities. Writing in The Los Angeles Times, Ken Bensinger cites the case of Phoenix-based DriveTime Automotive Group, which bundled 52,000 car loans given to borrowers with an average credit rating of 518, which is considered “deep subprime.” They charged the borrowers an average of 21% interest and sold the bundles in two offerings for $461 million.
-David Wallechinsky, Noel Brinkerhoff
 

Investors Place Big Bets on Buy Here Pay Here Used-Car Dealers (by Ken Bensinger, Los Angeles Times) 

Comments

obelus 7 years ago
to joe: the point of the article is not that used car dealers are making unscrupulous loans it is that they are securitizing sub-prime loans and thereby selling off the risk. if a dealer wishes to assume the full risk of financing the purchase of a car to a customer, let them do so. however, if they then bundle their book and sell off the risk they are more likely to extend credit to unqualified buyers simply because they won't suffer the losses stemming from default. this sort of leverage was highly instrumental in the collapse of the housing market, and will no doubt create a similar bubble in the sub-prime car loan market. in the example you offer, a default trims the return on $30k of loans to 5%. however, if the dealer has sold off the loans through the securities market, their loss is zero. this encourages them extend credit where it doesn't belong. in short, the article is not questioning the practice of dealer financing, it's questioning the securitization of such loans.
Buyer 7 years ago
i bought from one of these dealers years ago when i turned seventeen. i may have paid a little more in interest but it was worth it. i bought a truck and started working to pay for it and everthing else in life. there are a few of these dealers in manassas, va that i would not recommend but there are many new car dealers (stealerships) i would not recomend. shop around you will find several good dealers in manassas. they are ussually the ones that have been there for more than two years.
Joe 7 years ago
came across your article earlier today. as a "buy here pay here dealer" i noticed that there were a few omissions. i realize that sometimes the source from which information comes from is not always accurate. most all buy here pay here lots are family run and have been for very many years. if there indeed are "big-money investors out there in this business we have not seen any. we use our own money. this business of "buy here pay here" started because that was the only way we could sell a car. our business has been along alot longer than the "sub-prime housing market" that has put us in such a financial crisis. we were not immune from the downfall of the housing market. we do charge a higher than normal interest on vehicles financed through our business for obvious reasons. first, is the math. most of our loans are less than $3000.00 at 21% apr over 1 year, is about $350 dollars. that is cheaper than a credit card!! now the figure of 1 out of 4 customers not paying back the loan is about right. well 1 out of every 10 usually takes the car and runs. so for every $30,000.00 in loans we make. there is a return of about $3,500.00 in interest, followed by a loss of about $2,000.00. big money right? as far as i'm concerned we struggle just like everyone else. comparing us to "big bankers" is just another form of mis-information attacking the very blue collar people trying to keep country going. thank you

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