Used-Car Scheme Makes Money off FICO Challenged

A new investigation by the Los Angeles Times has uncovered a profitable scheme by questionable auto dealers that have found a troubling new way to turn clunkers into cash, making money off those who can least afford it.

It's the fast growing world of Buy Here Pay Here used-car sales.

Customers, often those with bad credit and no other buying options, purchase road-worn vehicles from predatory dealers that require large down payments and charge exceptionally high interest rates—some as much as 30%.

"This is for the people who have no other choice and they end up on these lots," said Ken Bensinger, Los Angeles Times Business Writer and author of the investigation. These dealers make their own loans and "since they do their own lending, that means they make their own rules," he said.

The dealer finds out how much the customer can put down and how much they can pay each month before even showing them a car, Bensinger said.

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.

But the dealers have a second profit motive Bensinger said.

If a customer falls behind on their payments, dealers can repossess the vehicle and put it back on the lot for sale quickly, repeating the cycle all over again.

"When people get behind in payments, they take it back. It's their legal right to take it back but a lot of these lots do it as quickly as possible and don't really work with the people," Bensinger said. "As much money as they can make off a 30% loan, they can also make money taking the car back from you and selling it again to another person."

About 1 in 4 buyers default. Buy Here Pay Here lots sold nearly 2.4 million cars nationwide last year, according to the Times.

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