In the Midwest, it’s hard to get around without a car.
These days, people are holding onto them longer. The average vehicle is almost 11 years old and used cars prices are on the rise.
All this adds to the pressure on the bottom rung of consumers: people with bad credit.
For many, the only way to finance a car is at a Buy Here-Pay Here lot. Here, dealers loan to deep subprime customers at interest rates up to 25%. Buy Here-Pay Here makes up more than 15% of used vehicle financing in states like Illinois, Indiana and Ohio.
That financing goes to people like Willie. That’s her nickname.
We’re driving around Toledo in her ’99 Chevy Express. It’s got 130,000 miles on it.
“You’re gonna hear it really well,” she says. “It’s gonna be a pop pop. And then you’re gonna hear my belt.”
Honestly, Willie, Toledo and the van have all seen better days. Willie got laid off a few years ago. Now she lives on child support and she scraps. Literally.
“I’m a scrapping scrapper. I’m garbage picking basically just to feed my kids and taking whatever little job I can find,” she says.
No conventional lender wants to touch that. But when Willie’s dad was diagnosed with brain cancer, she needed a car to care for him. So she agreed to pay six thousand dollars for a van worth, maybe, half that. She keeps a tool kit handy in case it breaks down.
“Now I don’t even need it cause my dad passed away in August,” she says.
Philip Reed is Senior Consumer Advice Editor at the car site Edmunds.com. His take on the Buy Here-Pay Here market?
“It’s not one that we recommend.”
In fact, he uses the word predatory.
“Because people are taking advantage of people that are in a bad situation,” he says. “And they know they’re between a rock and a hard place. And they know the lure of having a car.”
The average Buy Here-Pay Here customer has a credit score less than 550. That’s considered deep subprime. They may have experienced foreclosure, bankruptcy, or a prior repossession. What makes Buy Here-Pay Here different is the dealer finances their loans himself. He is the bank, he takes a lot of risk, and he charges for it.
Melinda Zabritski is Director of Automotive Credit for Experian Automotive. She says Buy Here-Pay Here offers a valuable service to consumers who might otherwise be shut out of the market.
“You typically will see higher rates,” she says. “However, there’s also a much higher frequency of delinquency. People who work in this space might end up repossessing 60% of the vehicles that they’re financing.”
Now, critics see high repo rates as evidence of loans that are designed to fail. Matt Ghazal is trying to fight that shady reputation. He runs a Buy Here-Pay Here chain called Express Auto in West Michigan.
“The biggest misconception is we’re loan sharks and we gouge on payment and we gouge on price,” he says. “Although there are some that do, the vast majority of dealers out there are fulfilling a niche. And making an honest profit and providing an honest service.”
In the office, Ghazal posts tips on test driving, building credit, and not committing to more than you can pay. (Here’s a longer version of those tips, from the Federal Trade Commission.) He says about one in five of his customers don’t complete their payments. But the other four do, or they trade up.
“We try so hard to keep them in the vehicle,” he says. “We win when they stay in the vehicle.”
And come back to do business again and again. Still, it’s striking just how much it costs to have no money. Grace Diaz is 19, works three jobs and goes to school. Every other dealer turned her down. No credit.
“I’ve been trying for so long,” she says. “This is really nice to be finally done.”
She settles on a 2002 Pontiac Grand Prix. Team leader Paul Lucas breaks down the cost.
“The price of your vehicle is $8,995,” he starts.
Add in taxes, fees and a service contract:
Plus almost 20% interest over three and a half years:
“The total estimated amount of your payments comes to $15,375 and 30 cents,” he says.
$15,375 for a 2002 sedan. With the money she’s paying in interest alone, Diaz could buy a car outright. But she doesn’t have a lump sum, she has enough to pay the bills this week. When she drives off, Grace Diaz is excited and very grateful. She has to be at work in an hour.