John Oliver on Subprime Auto Lending
Financing can be a great tool, used wisely, and sometimes it can even be necessary to live in the United States. However, the finance industry is rife with people looking to take advantage of others, especially those who are already impoverished.
Used car dealers started the Buy Here, Pay Here industry to increase their profit on vehicles. Instead of just getting profit off of the markup on the vehicles, they could now get profit from ridiculously high interest rates charged to people who felt they had no other options.
However, California law has begun cracking down on Buy Here, Pay Here dealers. By forcing them to give warranties, their profit margins began to slip. So, the used car dealers needed to move the financing back out to finance companies. This boosted the subprime auto boom even more in California.
With this new opportunity, new lending institutions have been created. Oftentimes, they are no more than one or two people who have some capital and connections to a used car dealership or two. Because of this, they want nothing more than to repossess a vehicle and resell it as quickly as possible.
John Oliver gives some details on this phenomenon:
So What Should You Do to Avoid These Traps?
Find a dealer you can trust.
Talk to people about dealers that they have gone to, check your social connections to see if you have a friend in the industry that you can trust, or, at the very least, read Yelp reviews. Find a dealer who is trying to serve his customers and not bleed them.
Go to a reputable lender.
Don’t just let your dealership sell your contract to whoever they want. Establish an account with a local credit union and get financing there, or insist that one of the “big boys” (Wells Fargo, Bank of America, etc.) be your finance company. If those businesses won’t finance you, consider whether you’re overextending yourself and setting yourself up for trouble down the road.
Look for a reliable vehicle.
Many of the calls that I get are from people who bought a car, had it break down, and then couldn’t afford the payments. To give yourself the best chance of avoiding this situation, look for a solid, small, reliable car. Don’t get seduced by luxury brands, like LandRover or Mercedes. Those will be expensive to repair and maintain. Keep yourself within your financial limits to have the best chance of avoiding disaster.