Twenty-five years ago, when I was a single mother, and working two jobs, my car was the most important thing I owned. It got me to work; it got my kids to doctor’s appointments and sports and after-school activities. It was old and beaten up and, in the winter, the heat took a half hour to warm up, but it was reliable for the most part.
Then one day it wasn’t reliable, and I was stuck on the highway with no way to pick up my son at Boy Scouts. I ended up going to a “Buy Here, Pay Here” dealership where, for very little money down, and a long-term payment plan, I was able to drive home in what seemed to be a good used car.
Several months later, when I was one day late on a payment, that car was repossessed from my driveway.
Research shows that 85 percent of all workers depend on a car to get to work; for many people, it is a necessity, not a luxury. And a new car purchase may be out of reach for many low-income workers.
However, predatory car dealerships are there to take your money and take back the car if you are, as I found out, one day late on your payments.
For millions of Americans who have shaky credit and have to turn to subprime auto loans with high interest rates and hefty fees to buy a car, there is no getting out, you will have to continue paying, even if the car has been repossessed.
Fraud across the banking industry and easy access to credit for subprime home buyers led to the housing industry’s demise a decade ago, but lenders never turned the spigot off for auto lending. These scam artists are using the same formula to sell used cars.
Once the recovery from the 2008 crash started, the financial industry shifted its target to bad and low-credit buyers, and in turn, car sales picked up. The focus on subprime auto lending brought record sales across the car industry in 2016 and 2017. Now Americans hold $1.24 trillion in auto loan debt.
These car dealers don’t care if you have bad credit, no credit, a history of foreclosure or bankruptcy, or previous repossessions. In fact, they target people with a history like that! It means that the likelihood of them repossessing the car is higher and they can then re-sell that same car to someone in the same position.
If you purchase a used car with a sub-prime loan, you are likely to pay between 19 and 29 per cent interest. And what makes the monthly payments affordable is the fact that they stretch the loan out over a long period of time. That in turn increases the final cost of the car. It’s possible that you could ultimately pay $13,000 for a car that originally cost $3,000. And that’s just over three years.
Many of these auto loans, it turns out, also have a habit of haunting people long after their cars have been repossessed, and it has been reported that over 35 percent of all sub-prime financed cars are repossessed. And you are still liable for the debt, even though the car is gone.
The default rate on this type of loan is typically one in three within seven months of the original purchase. That means one in three people who use these kinds of loans will have their car repossessed. The reason for high-interest transactions, the dealer and lender’s argument goes, is to account for the risk they’re taking in financing a low-credit buyer’s car.
This kind of predatory lending is why it is often said that it is expensive to be poor. Everything costs more when you need it quickly. And it makes people desperate – so when you get what looks like a check in the mail for a large amount, telling you that you can apply that check to a used car, you can be tempted. Or when those loud television ads tell you that you can purchase a good used car even if you have no income – turn that off!!
If it looks too good to be true, it probably is.
When purchasing a car, take your time, look around, talk to your bank or credit union to see if you qualify for a reasonable loan. Ask a relative or friend with better credit if they would co-sign on a loan, but don’t give in to the immediate temptation of getting something for very little. Saving for large purchases, whether cars or furniture, is always better and safer.
When my car was repossessed, I learned my lesson. But those lessons are difficult for people who work hard at low-wage jobs. The next car I bought, I saved for and I was able to finance through a reputable financial institution.
As always, pass it on, talk to friends and family and remember to take your time when making large purchases!
This article was written by Catherine Blinder, chief education and outreach officer of the Department of Consumer Protection of the State of Connecticut. To learn more about how the Department of Consumer Protection can help, visit us online at www.ct.gov/dcp.