Sketchy ‘Buy Here, Pay Here’ Dealerships Boom As Economy Improves

Used car sales remained strong in the first half of 2013 as our economy slowly improves, according to a new report from the auto auctioneers at Manheim. Also on the upswing are the "buy here, pay here" dealerships that specialize in selling cheap used cars to high-risk buyers. Here's why that could be bad news.

Wholesale used vehicle prices are actually down three percent year-to-year, something Manheim attributes to strong new vehicle sales. The midsize and compact car segments have seen the largest drops in wholesale used prices due to attractive pricing, financing and incentives in the new car market.

But Manheim reports that employment growth is a major factor still driving used car sales. People are getting jobs again — though many would say not fast enough, of course — and they need vehicles to get to and from work. Now that they have the income to buy a car, the "buy here, pay here" dealers are showing strong growth.

As you may already know, "buy here, pay here" refers to dealerships that arrange their own loans and payments for cars, rather than through a third party lender like a bank or a credit union. This way, they can cater to people who have less-than-stellar credit and can't secure financing on their own.

Here's what Manheim chief economist Tom Webb said in their new report:

“The subprime and leasing markets performed very well in the first half of 2013,” Webb said. “The strong performance of ‘Buy Here Pay Here’ dealers has attracted competition to the market, among both other used vehicle dealers as well as from established lenders that until recently had avoided this higher risk category. Our outlook for this industry segment is positive for the next 12 to 24 months.”

On one hand, it's good because people do need cars so they can get around, and this helps them get access to transportation if they're locked out of the traditional ways of doing so because of bad financial decisions.

On the other hand, these dealerships are notorious for getting people into loan agreements where they end up paying vastly more than the car is worth. Monthly payment? Try bi-weekly with 20 percent interest.

They can also be a lot less understanding and more harassing than banks when it comes to collecting on missed payments or reporting them to credit agencies, putting these subprime buyers into even worse positions. As CNN reported in 2010, most of these dealerships make their money on collections, not selling cars.

Generally, "buy here, pay here" dealerships should be avoided, especially when one considers the litany of cars available on Craigslist or even Auto Trader.

Perhaps the trend we're seeing here is that as the economy improves, people are falling back into old habits of making poor financial decisions. First we had the rising trend of 97-month new car loans, now we have a boom in "buy here, pay here" dealers. But car buyers need to know there are better alternatives out there than ruining themselves financially just for a set of wheels.

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