Edmunds.com: Cash for clunkers better than high-interest car loans
In the latest iteration of the classic buy or finance conundrum, Edmunds.com took an innovative look at the Buy Here Pay Here industry and its alternatives.
Subject of increasing attention in recent years, the Buy Here Pay Here used car lots target consumers with credit issues, cash shortages and an urgent need for transportation.
That combination allows the dealerships, which finance their own loans, to charge interest rates upwards of 30%, demand large down payments and repossess with aplomb. Buy Here Pay Here lots can get away with all that because the customers have no other options. Or so the thinking goes.
In response to a series of Los Angeles Times articles on the industry, Edmunds set out a year ago to test that assumption. The experiment, called “The Debt-Free Car Project,” involved purchasing a 17-year old used Lexus outright, driving it for a year, selling it, and then comparing the total out-of-pocket costs to a Buy Here Pay Here (BHPH) loan on a somewhat newer car.
Even after spending $3,800 for the car and an additional $3,286 in maintenance, the buyer of the creaky Lexus – and given all the repairs it required, it was pretty creaky – still would be ahead of the BHPH customer to the tune of about $5,700. That’s because, Edmunds calculates, a BHPH loan, all in, would cost $12,784 over the life of a typical 36-month payoff period.
The moral of the story, Edmunds consumer advice editor Ronald Montoya writes, is “that if you make financial sacrifices now, you will reap the rewards later.”
But to get to that conclusion (and there are caveats), Edmunds had to jump through a lot of hoops. And they’re meticulously detailed in multiple postings on the progress of the Lexus over a 13-month period that begins on a small dealership lot and ends with the car being sold to an Edmunds employee.
Along the way, Edmunds editors documented every fill-up, smog check and repair. They drove the Lexus cross-country and through rush hour traffic in Los Angeles, racking up more than 18,000 miles and averaging almost 25 miles per gallon of gas.
They had to fix a lot of things on the Lexus -- including replacing the tires, battery, brake rotors and control arm bushings – and the car left them stranded twice, but the final impression is that it was still a better deal.
It’s an interesting issue to consider. Buy Here Pay Here financing can be crippling to consumers with few other options and a dire need for transportation so they can work.
Edmunds was quite conservative in estimating the BHPH costs, using a 17% interest rate that is far below what, in practice, many such dealerships charge. But as critics of the project – including the editor of a national BHPH trade publication – have noted, the simple fact is that many potential BHPH customers simply don’t have the time to scrape together several thousand in cash. They need a vehicle right now – to get to work, to take their kids to school, to survive in a car-dominated society. And because they have bad credit or no credit at all, they can’t go to the bank or a traditional dealer.
And that’s precisely where Buy Here Pay Here’s flexibility in lending to almost anyone with a steady paycheck comes in.
Customers of the lots tend to be very aware that they’re paying out the nose for the privilege of buying what are often poorly maintained, unreliable vehicles. With a nationwide dearth of charitable low-income car ownership programs, many credit-challenged working families just don’t see any other option.
Put another way, the math behind the Edmunds test posits that the down payment on the theoretical Buy Here Pay Here (a 10-year-old Ford Taurus) would be $800.
What kind of a car could a debt-conscious consumer without access to conventional loans get for that price on Craigslist?
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