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Predatory Lending Practices Continue in Used Car Lots

As car dealers nationwide prepare for a banner year in 2012 in terms of new car sales, there is another group of auto dealers that also expect a windfall this year:  “buy here, pay here” dealerships. 

Unlike traditional dealerships, which offer subprime auto loans through third party lenders, a buy here, pay here dealership offers a loan that is directly financed by the dealership, so there are no complicated forms or credit checks to pass.  Consumers pay heavily for the privilege, however:  these types of loans attract interest rates upwards of 20%. 

A business model is emerging for these dealership, one that is directly related to predatory lending practices.  Often the same car may be sold several times from “buy here, pay here” lots, after being repossessed due to buyer difficulties in keeping up the monthly payment.  Repo rates for cars sold at “buy here, pay here” lots are around 30%, and each time the car is resold, the dealer receives a cash windfall for the price of the car plus the associated interest over the term of the loan.  

The open question about these types of lending practices is whether or not they will produce the same kind of “bubble” that recently burst in the housing market.  “Subprime” mortgages are a large part of the reason that the economy slipped into recession in the final months of 2008, and many analysts believe why it continues to struggle.