Friday, March 20, 2009

Buy Here, Pay Here Autos...A Good Idea Gone Bad?

Within the last couple of years, North Carolina's attorney general has eliminated the “pay day” loan operations that were operating within the state, and blocked some “pay day” loan and “pay day advance” companies from doing business online within North Carolina. Now, we can't help but wonder, how long it will be before (if it ever does happen) North Carolina's attorney general, Roy Cooper, takes a long hard look at a segment of the used automobile industry that seems to go unnoticed. That is the wide spread plethora of “buy here, pay here” dealers across the state. These are not just your small business type used car dealers with a corner lot on a well-travelled thoroughfare, either. Now, some of the new car dealers have expanded into this business as well.

Here is how it works. John Brown needs a vehicle, but, John either has no credit history or his credit is so bad he can't get a loan to use a pay toilet. So, John looks through the local ads in the newspaper, or the local classifieds tabloids, and visits individuals, and or various dealers, and just can't get anything, even though he has a down payment of about 500 bucks. So, in desperation, especially since John needs transportation to be able to go to work, to pay his bills, to pay his rent, and to eat, John visits one of the dealers with a “buy here, pay here” program. They have a full-page color ad in the local classifieds tabloid, with photos of three or four (sometimes many more) vehicles that say financing is available for people with “no credit, slow credit, or bad one will be refused”. The cars shown don't look too bad, and the ads speak of down payments as low as 200 bucks, and weekly or bi-weekly payments of forty to sixty dollars.

So, John goes down to the dealership advertised. When he gets there, he finds that all of the cars advertised have either been sold, or moved to “our other location” a county or two away. So, John goes ahead and fills out the paper work, and the dealer tells him to come back the next day or maybe even later that evening. Upon leaving, John sees some other vehicles that don't look quite as good as those advertised and maybe aren't quite as new. John needs a car badly, and he's willing to take anything that will get him around.

When John returns, the dealer greets John, and gives him the good news, that he will be able to get a car. They show John a 1995 Chevy S-10 pickup. It's a “5 speed, four cylinder gas saver”, with AM-FM cassette, ABS brakes, power steering, and 120,000 miles. They suggest John take a spin around the block, but, first, they ask if he has his down payment. Just let them have it, and they will take it to the cashier and get John a receipt. So, John gives them his cash, and takes the truck for a spin. It runs OK. When John gets back, he goes into the office, and he signs the papers, that tell him he is paying 500 bucks down, for a truck priced at 8,200 bucks. His interest rate is 25% APR. Since John is paid weekly, he will make a weekly payment at the dealership of 78 bucks for three years. The dealer keeps one of the truck keys, so that he has the extra key to “come and get the truck” if John defaults.

A few months down the road, John has some problems from the vehicle. If the dealership repairs them, they either add the repair charges to the “financing” or allow him to “pay extra” on his weekly payments to pay for the repairs. After a year or so, John thinks he may be ready to trade up. He finds that this truck, which now has 145,000 miles on it, is worth about 700 bucks trade-in value. Even worse, after he has been paying for 15 months, he still owes over 7,000 bucks on it, and this has done nothing to improve his credit rating!

Now, if John defaults, and the dealer has to repossess the truck, he doesn't care. Because he sold John a vehicle worth 1500-3000 bucks at best, and he has already made a profit on it. He will just sell the truck again to someone else, and the scenario starts all over. Meanwhile, John has thrown away over 5,000 bucks, and is once again trying to find a vehicle. If John keeps the vehicle, and manages to pay it off, he will have over 12,000 bucks spent on a vehicle worth less than 1,000 bucks, and he still has no help for his credit record, because his good payment record does not go on his credit reports.

The above scenario is not just a rare occurrence. It's the norm for most “buy here, pay here” operations. Vehicles are sold to desperate buyers, at overly inflated prices, and at interest rates that can be as high as state usury laws will allow. If the buyer defaults after making payments for six months or more, the dealer will just resell the vehicle. He's already made a profit on it, and will now make a little more. Some dealers install hidden GPS units in the vehicles so they can be located if the buyer defaults. In some states, dealers install a device that will only allow the vehicle to start when the driver inputs a code he has been given by the dealer after he makes each payment.

I know one woman who missed a weekly payment, and the dealer asked her out. She declined the invitation, and two days later, he repossessed the car. And this was right here, in Buncombe County.

To this writer, this all seems to be another case of people being taken advantage of. No one should be charged a price that is three or four time the worth of a vehicle with high mileage on it. It seems that there should be some type of regulations in place to prevent abuses from occurring. When there is no other alternative available, and people become desperate, should they be taken advantage of? Everyone hits a bump in the road now and then, and sometimes people get into situations that they normally wouldn't if desperation didn't over rule common sense. Should that bump turn into a cliff? How is this not as bad as “pay day loans” or “pay day advance” services?

Any ideas out there?

Martin Van Buren And The Panic Of 1837

NOTE: Since we are going through an “economic downturn” (depression/recession) as the pundits like to call it, I thought it might be interesting to look at another period of “economic instability” from a time other than the Great Depression, and the President who was in office at the time. I thought President Van Buren's comments regarding governments role in economic crises somewhat appropriate for today, especially considering the Congressional penchant for “bailouts”.

Martin Van Buren was the eighth President of the United States serving from 1837-1841. He was the first American citizen to be elected President who had not been a British subject. He had served as the Vice-President during Andrew Jackson's second term as President from 1833-1837. He was nicknamed “the Magician” because of his behind the scenes political maneuvers. However, unlike Jackson, he was never able to win popular support for himself or his policies.

In his inaugural address Van Buren had assured the nation that he would attempt to continue to follow the policies and examples set forth by Jackson, and as evidence of his intent to play the role of caretaker, he reappointed all the member's of Jackson's cabinet. In his address Van Buren had described the United States as being “an aggregate of human prosperity not elsewhere to be found”. Then, the United States first major economic depression, the Panic of 1837, hit the country, when the banks suspended the payment of gold or silver for paper money. Van Buren got the blame for it, even though it occurred only two months after he took office, and effectively killed any chances of his ever achieving popularity.

When this depression hit, Van Buren called a special session of Congress in September 1837, asking for the establishment of an independent treasury system (so the government could retain control of collected tax money instead of depositing it in private banks), and proposed the government begin issuing paper money in the form of treasury notes. Van Buren warned that it was not within the constitutional rights of Congress to give “specific aid to the citizen to relieve embarrassments arising from losses by revulsions in commerce and credit.

Further he said: “All communities are apt to look to government for too much. Even in our own country, where its powers and duties are so strictly limited, we are prone to do so, especially at periods of sudden embarrassment and distress. But this ought not to be. The framers of our excellent Constitution and the people who approved it with calm and sagacious deliberation acted at the time on a sounder principle. They wisely judged that the less government interferes with private pursuits the better for the general prosperity. It is not its legitimate object to make men rich or to repair by direct grants of money or legislation in favor of particular pursuits losses not incurred in public service. This would be substantially to use the property of some for the benefit of others.

Congress was slow in approving Van Buren's suggestions, with the independent treasury system not coming into effect until July 1840. Prosperity temporarily returned in the winter of 1839-1840, but bad times recurred at the end of the Van Buren administration, continuing until 1845.

Van Buren was unanimously chosen by the Democratic Convention to run for a second term in the election of 1840. Delegates were unable to decide on a vice-presidential candidate leaving the choice up to the electors, thus leaving Van Buren without a popular running mate to bring him support, and all the forces that opposed him united behind the Whig candidate, William Henry Harrison.

Whigs called the President “Martin Van Ruin” because of the nationwide depression. They portrayed him as an aristocrat who drank his wine from a silver cooler and ate his meals from gold plates, and criticized him for using public money to install a hot water tank in the White House to warm his bath water. They featured Harrison as a man of the people who could live in a log cabin and be content with hard cider. The facts were that Harrison was born in a mansion as a Virginia aristocrat, while Van Buren was the self-made son of a tavern keeper. The voters believed the Whig version, and Van Buren was defeated.