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The Truth Examines Despicable
Lending Practices – Part 4 – Our Love of Cars … And Bad Car
Loans
By Megan Davis
Sojourner’s Truth Reporter
As each
New Year approaches, many people make resolutions and plans.
Some want to lose weight; some want get married, find a new
job, or buy a new car. After a month, or two or three, when
that tax refund check comes in the mail, it is not uncommon
for a single mother or a young man to use the extra funds to
buy a car.
.
Often, in
a moment of desperation, a mother will go to a car lot that
does not check her credit, takes her down payment and sells
her a car without questions asked on either party’s part.
Refund season, unfortunately, is a time when many people
make uninformed, rash decisions about major transactions.
Some may squander the money on clothing and lavish outings
while others make larger purchases. Once the down payments
are made, the ongoing payments become a thorn in their side
and often leave them in a worse situation than before.
Thinking
back on a time when she was a single mother, recently
divorced and working two jobs, Dawn (not her real name)
remembered how difficult it was to get back-and-forth to
work with four children and no car.
She lived
with her parents and had to rely on them or other family
members and friends to not only help her get back-and-forth
to work, but also transport her children back-and-forth to
school and daycare.
As often
occurs, when couples become separated or divorced, there are
matters of financial issues that may go unresolved during
divorce proceedings. Sometimes, the debts are split in half,
but often there is one ex-partner who is left with the bulk
of it.
Buy
Here, Pay Here Auto Lots
In Dawn’s
case she was the person who carried most of the debt from
the marriage since everything was in her name including
utilities, lease agreements and other bills. Such debt
prevented her from obtaining any type of personal loan to
pay her bills or to purchase a much needed car.
During
this time, in early 2000, there were numerous commercials on
radio or television which catered to customers who had bad
credit or no credit at all. These commercials explained that
anyone who walked in with a down payment of at least $500
could leave the same day with a vehicle of her own. The
commercials also emphasized that there were no credit checks
and no hassle.
Knowing
that there was no chance that she could apply for a
traditional bank loan, Dawn set out to save up money from
her next paycheck in order to walk into a “buy here, pay
here” dealer and drive away with a mini-van for her family.
She went
to the now-defunct Baypoint Auto Sales which was close to
where she lived, and walked the lot until she found a van.
She went into the office and told the salesman that she was
interested in the vehicle and let him know that she had her
down payment of $500 in hand.
Her father
was with her and together they looked over the van and made
sure everything worked. He checked under the hood then gave
her the thumbs up. The salesman explained that payments were
only $50 per week and that it could be paid bi-weekly
directly from her paycheck. She agreed, gave them the money,
signed some documents and drove off with her first vehicle
purchase as a single mother!
"This was
a moment of empowerment for me,” she recalled. “Being able
to get a van for my kids and me was an amazing feeling. I
couldn't have been more proud of myself.” She will never
forget her burgundy Dodge Grand Caravan.
At the
beginning of the millennium, buy here, pay here car
dealerships were popular throughout the city of Toledo, many
of them concentrated on the east side along Woodville Road
and Navarre Avenue. One could also drive down Laskey Road,
Reynolds Road, Dorr Street and the Central Avenue strip and
find a number of car dealerships that offered the buy here,
pay here option. These auto dealers attract consumers who
have low to moderate incomes and those with poor credit
ratings. The dealers charge outrageously high interest rates
on their “in-house” loans.
“Once you
buy a car from a dealer like this, you quickly have to start
putting money into it” said Dawn. Cars sold in businesses
like that are sold “as-is.” Customers know this, but feel as
though they have no other choice but to accept it and take
the car. It is cheap enough to afford out of each check,
goes the theory, and if you take good care of it, it should
last a while.
Unfortunately, customers tend to find that once the car is
paid off or nearing that point, they have sunk hundreds or
even thousands of dollars into the vehicle for maintenance
and repairs. Many times, these cars are in the auto
graveyard before the final payments are made.
“I had to
go back and get another van.” Dawn said. Over the last 15
years, she has purchased five vehicles from buy here, pay
here lots in Toledo including two from Nationwide Auto
Finance.
Joe (not
his real name), a former car salesman, has worked for both
traditional auto dealers and buy here, pay here dealers. He
explained that used cars are often sold as-is and that the
main difference between a traditional auto dealer and the
buy here, pay here dealer is that traditional auto companies
will report delinquent payments to credit bureaus, affecting
your overall credit score.
Another
difference that sets predatory auto lenders apart from
traditional ones is that the cars they sell are often
purchased at auctions for little to nothing.
“The
customer’s down payment pays the value of the car and
everything else is gravy” said Joe.
If a car
is purchased from an auction for $500, dealers can hike up
the price to $5,000 which is 10 times what the vehicle was
worth, making this business quite lucrative.
“Most of
the cars that are bought at an auction aren’t even serviced.
They take them straight to the lot. They may wash them and
clean the inside, but that’s it. Some are even purchased 10
or 20 at a time as-is and customers are at the mercy of the
dealer. When you make the purchase, you’re already starting
upside down,” Joe continued.
When stuck
with the almost immediate need for repairs, customers often
find themselves in a situation of having to pay for
expensive car repairs while still maintaining the weekly
payments. If too many payments are missed, the car may be
repossessed. This is when they turn to payday lenders or to
title loan companies if they managed to pay the car off but
still need numerous repairs.
In 2012,
Attorney General Mike Dewine sued two buy here, pay here
dealerships – Keep It Moving Auto in Cleveland and Auto
Finance South of Columbus – citing violations of Ohio’s
consumer laws. More than 50 complaints sparked an
investigation and a subsequent lawsuit. Violations included:
●
Failure
to notify consumers of payment due dates or the total cost
of credit resulting in acceleration clauses that require
consumers who defaulted on payments to pay the balance in
full immediately.
●
Failure to obtain
certificates of title in the time required by law
To
resolve title complaints, the Ohio Attorney General’s office
provided more than $9,000 in consumer restitution through
the Title Defect Rescission Fund. DeWine cautions buyers to
be prepared when buying a vehicle by researching the
dealer’s reputation, being clear on payment schedules and
getting it in writing and to be sure that the documents are
completely filled out, with no blanks where dealers can
write in other stipulations without customer knowledge.
“When you
come to the Toledo Urban Federal Credit Union and want to
apply for a loan, we give the customer the application to
complete. When you go into a buy here, pay here lender, you
sit down at their desk, and they ask you questions
and fill an application out for you, making it
impossible for you to read the documents and have an
understanding of what you’re agreeing to,” said Suzette
Cowell, CEO of TUFCU.
Auto
Title Loan Companies
Often
times, customers who fall behind on expenses will go to
title loan companies to borrow against their vehicle’s title
to catch up on their bills. The car must be paid off and
owned by the borrower.
Carmen
owned a Trailblazer that needed underbody work, she recalls
about that very stressful time in November 2015 when she got
involved with an auto title lender. She went to Cash Max – a
self-styled credit service organization – on Glendale and
Reynolds and arranged to borrow $1,500 to have her car work
done.
The $1,500
loan required her to pay, monthly, $402.87 in interest and
fees and Cash Max received the title for the Trailblazer. As
a credit service organization (CSO), Cash Max is not
required to observe state laws restricting the cap on annual
percentage rates (APR) that pay day or auto title lenders
must observe. According to an Ohio Supreme Court ruling in
2014, the sky’s the limit.
In this
case, the APR Carmen was obliged to pay was around 225
percent.
Carmen
paid her monthly fees until June of the following year when,
due to the summer school recess, she was unable to work. Her
payments stopped and the lender sent the collection agencies
after her, as her balance continued to grow. When she
started work again in August, she was able to make
arrangements to start paying again but, by this time, the
$1,500 principal had ballooned to $2,291.19.
Naturally
Carmen could not make much headway towards paying down the
principal above and beyond the monthly payment and, at those
rates, she was eventually surprised to find out that no part
of those large monthly payments went toward the principal.
She might
have stayed in that predicament for years to come but
fortune favors the bold. And the bold one in this case was
not Carmen but Carmen’s sister. Unbeknownst to Carmen, her
sister took it upon herself to file a complaint with the
Better Business Bureau.
After Cash
Max received the complaint they called Carmen – who still
did not know the complaint had been filed – and very kindly
asked her to come in and re-negotiate the terms of her
agreement. They dropped the principal down from $2,291.19
and froze the amount due at $1,533.81. They arranged for her
to pay it off in monthly installments of $306.76.
Weeks
after that re-negotiation, Carmen discovered that her
sister’s initiative would end up saving her thousands of
dollars and years of grief.
Carmen
finished paying off the loan and got her title back this
past February. The good news – she is debt free; the bad
news – the Trailblazer is now back on life support.
Because
there are few regulations restricting title loan companies,
their unsavory practices slip through the cracks of
legislation. In 2006, a Georgia company, Loan Max, was sued
on behalf of three consumers. The borrowers alleged that
Loan Max violated state and federal lending laws by not
adequately disclosing the loans' terms, among other
infractions. Loan Max settled out of court to avoid a very
public trial and poor reviews. The amounts were not
disclosed.
Because
many customers buy pre-owned vehicles with no credit checks,
there is no risk to them if they default on payments or have
the car repossessed. To offset possible losses, buy here,
pay here companies have established partnerships with their
own group of lenders who finance loans for customers. This
way, when it is tax season and a customer goes to a dealer
with a larger than usual down payment, of $2000 for example,
they are now being guided into a more traditional car loan.
The
reality is that customers are paying the actual value of a
car up front, and the loan installments, which could be $650
or even more, are all profit. So borrowers can be the
victims of both the buy here, pay here lot and a separate
lender.
Traditional Auto Dealers
For the
novice car buyer, an attempt to purchase a vehicle at a
traditional auto dealership can be a harrowing experience
and just as fraught with financial peril as with the
predators detailed above.
High
pressure sales people, accountants who need in-depth
financial information, sales managers who supposedly have
the authority to cut special deals … the inexperienced buyer
is invariably inundated with information, questions, counsel
and advice once she expresses an interest in buying a
vehicle.
The
questions are primarily in order to run a credit check that,
if the buyer is credit worthy, will often lead to her being
steered to a lending institution and given interest rates
that are higher, much higher sometimes, than she could have
obtained on her own with a little research.
Many
customers don’t realize that their credit is being checked
since they aren not completing the paperwork themselves.
“Their credit could be run eight to 10 times before a lender
is found” said Delise Simmons, assistant manager of TUFCU.
“Every hit knocks your credit score down due to repeat
credit inquiries.”
Cowell
added that “A customer may start the day off with a score of
675 and end the day with a 610. Although they may agree to
one, they don’t realize they have signed to authorize as
many inquiries as it takes to get financed.”
Additionally, by utilizing the auto dealer’s lenders, a
buyer could end paying up to 28 percent in interest rates,
said Simmons.
The lower
the credit score, the higher the interest rates, and once an
agreement is made at such high payback rates, both the
dealer and the consumer leave the deal knowing that the
customer will often default. But the payoff for dealers is
that their cut of the deal is significant and this maintains
the profitability of the business.
“Cars
depreciate the moment you take possession.” Joe explained.
“If you’re buying a pre owned vehicle from a dealer, even
with a warranty, there isn’t much difference when you have
to start making repairs on cars and payments simultaneously.
Yet once you pay it off, you may find yourself already in
need of getting another car if the repair bill is too high.
You’re better off buying a brand new car!”
Both
Cowell and Simmons explained, “Look at the ads in the paper,
it may advertise zero percent financing, but the fine print
reads ‘with a credit score of 750 plus.’” They also suggest
that customers consider the loan agreement. “A good monthly
payment on a $15,000 car should be no more than $315.” said
Cowell.
Buyer's
remorse is the sense of regret after having made a purchase.
It is frequently associated with the purchase of a car.
“They come at you from every angle and corner you in those
small rooms.” said Cowell. She recalled wanting a Hyundai
and going to a dealer to take a look at some. “They told me
to take the car home. Once you get in the car and drive, you
fall in love, and then you will take the car no matter what
the cost.”
This is
the reason why she understands what consumers go through
when visiting a car lot. In her experience, she was
informed and she went in with her own financing, but the
average consumer is at the mercy of the dealer.
The Toledo
Urban Federal Credit Union offers education to their
members. They walk members through the process of
understanding the lending process, by teaching them how to
get reasonable financing through the credit union as opposed
to being hoodwinked into a blind deal.
TUFCU
instructs members on how to do the research including
finding the true Bluebook value of a car, as well as asking
dealers for Carfax information on vehicles they are
interested in. They also encourage customers to check and
see if the cars have salvaged titles. They offer lower
interest rates, possibly six to nine percent, and work with
consumers to build their credit the right way.
Their
relationships with auto dealers and other local companies
build trust between credit union members and businesses
because they take care in referring customers to people who
will have their best interest. In addition to services that
assist members in getting auto financing, the TUFCU offers
refinancing to help lower monthly payments for consumers who
have gotten into unreasonable loan agreements.
The art of
the deal is not necessarily complete when a buyer drives off
a lot in an expensive, shiny car to show off. The true art
of the deal occurs when a prospective buyer enters the
dealership having been educated and informed enough to
cruise off the lot with the peace of mind that comes from
knowing he has purchased a good car at a price he can
comfortably afford.
The Truth Examines
Despicable Lending Practices – Part 3 – Mortgage Predators |
