“Sub-Prime” Used Car Loans

Nov 28, 2011

The so-called “Buy-Here-Pay-Here” (BHPH) car sales have been increasing steadily in the U.S., with 2.4 million cars sold in 2010, up from 1.5 million cars in 2006.

The BHPH dealers sell used cars, typically for prices way above the cars’ Kelley Blue Book values. They issue the loans themselves–and charge astronomical interest rates, as high as 30, even 40%. When buyers default, the dealers aggressively repossess the cars and resell them–sometimes for an even higher price.

In short, these used car sharks prey on people who are trapped–workers who need a car to get to work, but “don’t qualify” for bank loans.

For sure, these used car dealers are bloodsuckers. But there are bigger bloodsuckers behind them. Private equity companies, drooling over the high profit rates of BHPH dealerships, are buying up BHPH chains right and left, and so are payday lending chains.

And the big banks and insurance companies have been gobbling up used car contracts. In the last two years alone, “institutional investors” have bought more than 15 billion dollars worth of “sub-prime auto securities,” that is, thousands of BHPH car contracts bundled up and sold as bonds.

Such a big demand from big buyers leads BHPH dealers to be even more aggressive in selling, repossessing and reselling used cars–at the expense of the people they lure in to buy the clunkers.

This is a carbon copy of what happened with sub-prime home loans. Driven by Wall Street, mortgage lenders aggressively pushed overpriced and even fraudulent loans on home buyers, leading to more and more defaults and foreclosures. When the housing bubble finally burst and investors got stuck with “securities” that contained thousands of defaulting mortgages, the government bailed out big investors–that is, big banks–but not homeowners.

The same crooks are now using bailout billions to inflate another bubble, this time in the used car market. It’s another scheme by the biggest banks to shake down workers for the last penny in our pockets.