Why do Buy Here Pay Here Cars Cost More?
It is true that vehicles sold to the least credit worthy customers do cost more. How much more depends on the business philosophy of each individual dealer. There does seem to be a misconception as to why Buy Here Pay Here cars cost more. Many say that the dealers are taking advantage of consumers with limited options available to them. I’ll describe why this is not always the case.
The original business plan of the first Buy Here Pay Here dealerships were to purchase vehicles for their lot at wholesale value, make repairs as needed, and sell to a customer that would not be able to purchase at a regular lot. The idea was to keep cost low because the owner was paying for each vehicle with his own cash. At the time of sale the plan was to obtain whatever the vehicle cost was as the initial down payment. So if the dealer purchased a vehicle for $1800 and made repairs of $300 the total cost of $2100 is what he would seek for the down payment. Anything less than this is what he would be “risking” on the customer. Once the initial transaction takes place all payments paid to the dealer afterwards would be considered as profit. Many people feel that if this dealer paid $2100 for the car and sold it for $6495 that they are making a profit of $4395. This would only be the case if that particular customer made all of their scheduled payments. In fact, at the time of purchase the dealer likely made $0. They will also have to provide title to the customer within 30 days which also means that they will have to cut a check for the customers taxes and title fees. So it actually cost the dealer money to sell the car. Times have changed and there are few dealers operating in this fashion.
Recent economic conditions over the past decade have changed the business. A national growth of prospective clientele who have fallen on bad times due to job loss, foreclosures, and repossessions has gained the interest of many lenders. Now the dealers no longer need to use their own capital to fund their customers loans. They are able to secure loans on behalf of their customers or they are able to lend their own money that they borrow from their line of credit. Many of these lenders still require recourse of some fashion. Recourse being that if the customer should go delinquent on the loan that the dealer must buy the loan back from the lender. Thus, creating the same problem as the original business plan. Expected profit must include possible delinquency and repossessions.
All business owners must consider their costs of doing business prior to pricing the product that they are offering. A typical car dealership has the cost of inventory, vehicle reconditioning, sales staff, finance staff, detailing staff, clerical staff, rent, warranty purchases, phone, energy, internet, licensing, training, website, transportation, and advertising to name a few. A Bad Credit dealer will have these same costs but in addition they also need Collection staff, Underwriting staff, Towing expenses, Impound expenses, Interest on borrowed funding options, as well as the most expensive… Recourse on bad loans.
Naturally, a vehicle at a less than perfect credit lot will cost a little more to factor these additional expenses in. Some places will still mark their vehicles up to 200% but others, like Vigo Car & Credit, only do a minimal markup to maintain a price as close to traditional dealers as possible.