Don’t throw money away – be wise when dealing with car loans|
Posted 8/23/2012 Updated 8/23/2012
Commentary by Jim Hart
JBER Public Affairs
8/23/2012 - JOINT BASE ELMENDORF-RICHARDSON, Alaska -- "Does this guy pay anyone back?"
That question came from my sales manager who had just looked at a man's credit rating. The abysmal number wasn't because of bankruptcy, it was simple irresponsibility. Late payments, bad checks, repossessions and a high debt-to income level - they all add up.
"Send him over to Buy Here, Pay Here, they'll be able to help."
"Buy Here, Pay Here" is a program often found at used car dealerships. It's a high-risk for the dealership, but also a very profitable program where financing is handled by the dealer. Think of it as lower than sub-marginal financing, but safer than loan sharks.
Programs vary, as do the ramifications, but by-and-large you pay as much as 30 percent interest for what can be a very used car. The payments are "affordable," but the value for the customer is very low. Essentially, you are renting to own, not simply financing.
Most often, we would send people with bad credit, but folks with no credit were also potential customers.
At our dealership, we had a relatively helpful program. As the customer made payments, we routinely reported them to the credit bureaus as "on time." If they were late on a weekly payment, our clerk was almost motherly in her tone to keep them on-time (she genuinely loved people, and it showed).
All this gentle handling was to help them stay on time (and build their credit up). It worked.
The goal was obviously to make good profits, but it also served to get them into a position where they could buy a used car using conventional financing. A helped customer is a loyal friend; the owners of the dealership understood that very well. We weren't primarily a BHPH, so we had a vested interest in long-term, financially sound customers.
Sadly, many BHPH programs are not so beneficial and should be looked at with a discerning eye. Frequently, the other dealers in the area would not report the customer's "on time" status, even after they paid the car in full. This kept the customers in perpetual slavery to a bad credit score.
Customers should be aware of what kind of business they're dealing with.
These venues are accustomed to dealing with irresponsible people who regularly pay late (if at all), and they are very adept at reporting these people to the credit bureaus and repossessing the vehicles. When you sign a contract to pay, understand the terms and conditions before you sign. It's cliché, but only because it is repeated (und subsequently ignored) so frequently.
With your bank or credit union, you often get a grace period for late payments. This can be a wonderful feature of having a good credit score. Credit scores reflect trust; a high score means they can trust you to make good.
If you're in BHPH (or similar financing), they already "know" they have to look at you with suspicion. If you're late with them, they don't usually have a grace period and will be very quick to send the repo man.
That said, there is nothing inherently wrong in what they are doing. There is tremendous risk in lending to people with poor or no credit. As a business, they charge enough money to make the risk-reward ratio acceptable. They would prefer to have trouble-free sales and completion of contract, but that's not the environment they operate in.
The best way to protect yourself from that environment is to avoid having to go there.
There are a host of other methods to building your score, as well as counseling services to help you maneuver the often complex issues of finance. Check with Army Community Services or Family Readiness for available programs.
Editor's note: Jim is an ASE and Ford certified mechanic and has worked as a salesman and service advisor.