A recent newspaper exposé of "Buy Here, Pay Here" car lots described the way that credit-challenged buyers regularly put down $3,000-$4,000 to purchase an overpriced used car, only to have it repossessed when they default on the payments. Buyers go to such predatory car lots because they feel they have no other option in car-buying. But if they shop strategically and stick to a budget, there is an alternative to these rip-offs: buying a very inexpensive car outright, for about the price of a down payment at a Buy Here, Pay Here lot.
In this article, we will describe the way that Buy Here, Pay Here dealers operate and the abuses that can ensue. We'll also show that car-buying in the lowest price bracket is not only possible but also the best way to avoid overpaying for a used car.
Inexpensive used cars now have a level of dependability that is far greater than the cars of two decades ago. And by buying a car outright rather than financing it, a shopper can free up money to pay for routine maintenance, gas and insurance. As it turns out, a cheap car can be a long-term transportation solution, not just a quick fix for a short-term finance problem.
Buy Here, Pay a Lot
Buy Here, Pay Here lots are independent car dealerships that specialize in selling used vehicles to people with bad credit. A buyer's dismal credit history gives the dealership an advantage in the sales process, because the consumer thinks he has no alternative but these dealerships, which have their own loan-approval departments. This belief allows the lots to charge exceptionally high interest rates: double or even triple the average used car interest rate. In some cases, they require the customer to make bimonthly payments at the dealership (that's the "pay here" part of the name).
As a recent newspaper exposé discussed, Buy Here, Pay Here dealers are quickly becoming a force to be reckoned with in the used-car market. Experian, a company that tracks credit scores and financial data, estimates that in the third quarter of 2011, Buy Here, Pay Here dealerships had a 14.3 percent share of the used-vehicle financing market. This is a 10.5 percent increase over the prior year and almost twice as much as the share held by captive finance companies of car manufacturers.
People who use Buy Here, Pay Here lots represent the credit segment called "deep subprime" and have a FICO score of less than 550. With a FICO score this low, most banks, credit unions or dealers are not likely to approve the buyer. Subprime lenders, such as Santander, will work with consumers to get them approved. But not all are guaranteed to qualify. Buy Here, Pay Here dealers take on nearly 57 percent of the loan risk distribution among deep subprime buyers.
The Alternative to Financing
If you have bad credit but need a car, the good news is that you have options, even if you don't qualify for some of the nonprofit programs that help low-income families obtain transportation. It's simple advice: Take the money you'd spend as a down payment and buy a solid, low-priced used car for cash.
Financing is the sticking point in the stories of Buy Here, Pay Here dealerships that take advantage of consumers. It doesn't matter whether a person fails to pay off the principal because of the high interest rates, goes upside down on a trade-in or cannot make the payments. The fact that they are beholden to the dealer is what keeps them in the vicious Buy Here, Pay Here cycle.
Experian says that the average deep subprime buyer typically finances a $13,826 used vehicle and has an average monthly payment of about $368. This may not sound like an unmanageable figure, but the numbers behind it are ugly. The typical interest rate in these deals is 17.7 percent for about 53 months. The average interest rate for car buyers with decent credit is 8.6 percent. High interest paired with a long loan term means the typical deep subprime buyer is paying more than $2,400 in interest alone on a purchase like this.
By buying a car outright, shoppers no longer have to worry about monthly payments, interest rates or trekking down to the Buy Here, Pay Here dealer to make a payment. We realize that cash-strapped buyers might not be able to pay cash for a car with a five-figure price tag, so it's time to reset your car expectations. Fortunately, you can get a reasonably reliable vehicle for less than $10,000.
If you already have a down payment saved up, use it instead to buy a vehicle outright. Any money that would've gone toward a monthly payment can now be saved and applied toward maintenance or any repairs that may arise.
If you don't have a down payment, here's what we recommend. Set a price goal that you can realistically achieve. Save whatever money you would have used for a monthly payment and use that to buy your car for cash. For example, a person who saves up the typical deep subprime monthly payment of $368 for 10 months would have $3,680 to buy a car outright.
To get started, look at the Edmunds article about how to buy a used car for under $2,500. Follow the tips to help locate and purchase an inexpensive car. Keep in mind that in this price range, you are not going to get the latest model with all the frills. But you will have money in your pocket to use for maintenance or repairs. What you will find when you shop are a number of high-mileage cars with a few dents and dings. But as long as the car runs well and has been properly maintained, it should keep you out of the finance office of a shady dealership.
200K Is the New 100K
Maintaining your "new" used vehicle with oil changes and tire rotations is always a good idea, but with a low-price, high-mileage used car, it becomes even more crucial. A car in this price range probably will have more than 100,000 miles on it. This isn't the beginning-of-the-end milestone it used to be. If properly cared for, modern engines can easily reach 200,000 miles. It won't always be a carefree road to 200K, but if you keep up preventative maintenance, you can spot any issues before they become costly repairs.
If you take your car in for service and the mechanic returns with a laundry list of items that need attention, don't panic. You just will have to prioritize what items to address first. This maintenance article will give you a basic rundown on how to take care of an older vehicle.
Don't Forget the Other Expenses
Buying the car is one part of the transportation-cost equation. But you still need to factor in the costs of fuel, insurance, preventative maintenance and repairs. Take a look at this article to learn how to lower the operating costs of your vehicle. The U.S. Department of Energy's Web site can help you get a better idea of what you may spend on fuel in any given month. On this Web site, you can look up your vehicle's fuel economy and input your annual miles to get a personalized annual expense report.
Bargain Car for the Short or Long Term
If the thought of driving a budget car is a blow to your ego, keep in mind that you don't have to drive it forever. You can drive it for a few years while you are able to save up for something newer. Or you can follow the lead of one of our editors. He sold his 10-year-old car with more than 100,000 miles on it for $250 to a friend who was trying to get out from under a mountain of bills. That friend took good care of the car and has put another 100,000 miles on it. And he is now completely debt-free.
Not everyone will be lucky enough to have a friend who will sell him a car for a few hundred dollars. But if you follow the basic concept of buying a bargain car, and if you put money aside for its upkeep, you will avoid many of the trials and tribulations associated with financing an overpriced, high-interest-rate vehicle from a Buy Here, Pay Here lot that just wants to suck money out of your wallet.
To find a dealership that knows how to treat shoppers right, please visit Edmunds.com's Dealer Ratings and Reviews.