The Los Angeles Times has an excellent investigation into the national “Buy Here Pay Here” auto dealership phenomenon. These used car sellers purposefully target bad credit borrowers and offer them what no one else will: the chance to buy a car on credit. All they have to do is agree to 20-30% interest rates, a price well above the car’s Blue Book Value, and aggressive repo practices if they fail to pay up. But it’s not a big deal if they don’t. Borrower failure is baked into the business plan.

In fact, some of these dealerships are accused of purposefully structuring loans so as to virtually guarantee the borrower will default. Then they can repossess the car and sell it to a new customer with the same high interest rate, while still pursuing the old borrower for their debt. Every time they can repossess a car and resell it, it’s like minting money.

And sometimes the dealers will resort to tricky practices to get their cars back, as the LAT writes of one borrower who had put $3,000 down on a 2007 Ford Fusion with monthly payments of $387, or 20.7%, roughly three times the normal rate:

A year and a half later, Lee fell behind on her payments and filed for bankruptcy. So she was relieved when the dealership called and offered to make her loan more affordable. The sales manager even promised to throw in a free smog check. Lee, 35, drove back to Repossess Auto on a rainy Monday evening, handed the keys to an attendant and sat down with the manager.

Moments later, she said, employees parked four cars tightly around the Ford, blocking it in.

There would be no new deal. Lee’s car was being repossessed. She and her children waited in the rain until a friend could drive them home.

Most car dealerships are the middleman between the buyer and the financing. Buy Here Pay Here lots — so-called because they require the buyers to make their monthly payments in person because that makes it easier to seize the car if borrower shows up in person — do all the financing themselves. This makes them not covered by the normally regulatory oversight a financial institution or even a normal car dealership would have, letting these dealerships make up their own rules and profit margins.

A vicious cycle in the used-car business [LAT] (Thanks to Wayne!)

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