NICK. Thanks for the perspective. I wasn't at all aware of an under- or over reserve situation.
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Regarding bhph dealerships:
articles.latimes.com
January 25, 2012|By Ken Bensinger, Los Angeles Times
"New legislation in Sacramento aims to protect car buyers from being overcharged at used-car lots by requiring the dealerships to post the fair market value on each vehicle they sell.
The goal, Assemblyman Bob Wieckowski (D-Fremont) said, is to help inform consumers who otherwise have no idea what a fair price for a vehicle is before agreeing to buy it.
Although the bill applies to all lots selling used cars, he said AB 1534 is aimed specifically at Buy Here Pay Here dealers, which sell to people with low income and bad credit.
Because they are often the lender of last resort, Buy Here Pay Here dealers are able to mark cars up far over fair market value because their customers are desperate for transportation and have little bargaining power. Combined with interest rates that can exceed 30%, customers of such lots often end up paying 10 times what a car is worth."
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This Los Angeles article described the situation the writer saw:
articles.latimes.com
"A vicious cycle in the used-car businessWheels of Fortune
Sign, drive, default, repossess and resell — that's the game at Buy Here Pay Here dealerships."
October 30, 2011|Ken Bensinger, Los Angeles Times
First of three parts
"Tiffany Lee wanted a car. She was weary of the two-hour bus ride to her job at a UCLA Health System clinic. She hated having to ask friends to drive her 7-year-old son to his asthma treatments.
But as a single mother with three children, bad credit and a $27,000-a-year salary, she couldn't find a bank or dealership willing to give her a loan.
Then a friend steered her to Repossess Auto Sales in Hawthorne.
Another buyer might have balked at the deal she was offered. Lee figured she had no choice. She put $3,000 down and drove off in a 2007 Ford Fusion, agreeing to pay $387 a month for four years. The interest rate: 20.7%, nearly triple the national average for a used-car loan.
A year and a half later, Lee fell behind on her payments and filed for bankruptcy. So she was relieved when the dealership called and offered to make her loan more affordable. The sales manager even promised to throw in a free smog check. Lee, 35, drove back to Repossess Auto on a rainy Monday evening, handed the keys to an attendant and sat down with the manager.
Moments later, she said, employees parked four cars tightly around the Ford, blocking it in.
There would be no new deal. Lee's car was being repossessed. She and her children waited in the rain until a friend could drive them home.
Lee, who described that night as “one of the worst experiences of my life,” had stumbled into the bare-knuckle world of Buy Here Pay Here used-car sales.
In this little-known but fast-growing corner of the auto market, dealers command premium prices for road-worn vehicles and finance the sales at interest rates that can top 30%.
In a kind of financial alchemy, they have found a way to turn clunkers into cash cows and make money off the least creditworthy customers: the millions of Americans who are stuck in low-paying jobs, saddled with debt and unable to qualify for conventional auto loans.
For most of those people, having a car is the only way to stay employed, and they'll accept almost any terms to get one.
Buy Here Pay Here lots sold nearly 2.4 million cars nationwide last year, up from 1.3 million a decade ago, according to CNW Marketing Research.
CNW estimates that there are more than 33,000 such lots nationwide, compared with about 20,000 dealerships selling new cars. Buy Here Pay Here dealers make $80 billion in loans every year, according to the Federal Deposit Insurance Corp.
Although dealers are loath to open their books, profit margins average nearly 40%, according to a trade group, the National Alliance of Buy Here Pay Here Dealers. That's twice what new-car dealers make.
Many of the lots require customers to return once or twice a month to make loan payments in cash -- hence the term Buy Here Pay Here.
A key reason for the industry's growth in tough times is that dealers can come out ahead whether or not customers keep up with their loan payments.
About 1 in 4 buyers default. In the real estate and credit card industries, that would be bad news. In the world of Buy Here Pay Here, it's just another avenue for profit: The car can be repossessed and put back on the lot for sale in short order. A new buyer makes a down payment, takes on a high-interest loan and the cycle starts anew.
Provided they don't get wrecked, these recycled vehicles just keep paying dividends. At some dealerships, cars have been sold and resold over and over -- three, four, even eight times apiece, motor vehicle records show."
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