In the second of a three-part series on “Buy Here Pay Here” dealerships, used car lots that target subprime borrowers with easy credit and triple the national average interest rates, the Los Angeles Times looks at how private equity firms have flocked towards the growing industry, lured by 38% margins.
“The amount of return from these loans you can’t get on Wall Street. You can’t get it anywhere,” Diaz, national sales manager for Small Dealers Assistance Inc., a buyer of loans created by Buy Here Pay Here dealers, told the Los Angeles Times. “It’s the gift that keeps giving.”
Private investors are buying up Buy Here Pay Here chains, and shares of the companies being publicly traded are getting snatched up on Wall Street. Traditional payday lenders are also getting in on the action.
The parallels between subprime car lending and subprime home lending are striking. Both hone in on borrowers that can’t get loans anywhere else, offering them a piece of the American Dream. What’s your own house with a white picket picket fence without a car in the garage? In both cases, the loans are ending up getting securitized and resold to Wall Street. This flood of capital encourages dealerships to grow and proliferate. In subprime lending, you build up by lending down, loosening your credit restrictions to draw in even riskier borrowers.
“It might be an attractive model to investors, but when it’s designed to ruthlessly maximize profit, there’s no way it can’t hurt the consumer,” Kathleen Keest, senior policy counsel for the nonprofit Center for Responsible Lending told the Los Angeles Times.
Investors place big bets on Buy Here Pay Here used-car dealers [LAT] (Thanks to Wayne!)
“Buy Here Pay Here” Dealerships Investigated