New rules placed on California Buy Here Pay Here dealers go into effect this week. The legislation will enhance consumer protections through better disclosure, limit costs on car repossessions, put limits on the use of GPS trackers and starter interrupters, and force dealers to get licenses.
The Buy Here Pay Here business model is relatively simple: sell older cars at high mark ups, charge high interest on in-house financing, and then repossess early and often.
California’s new law will require BHPH dealers to provide written disclosures about the value of the cars that they sell.
What would you pay for a 2003 Chevy Trailblazer with 140,000 miles? At the local Buy Here Pay Here lot, there is one for sale for $9,900. The Kelly Blue Book says it is worth $4,800 in good condition. It can be financed at 29 percent interest today. Currently, BankRate says that the going rate on a sub-prime used car loan is 9.34 percent.
Still, recent financials give a more systematic viewpoint of the process: In the quarter ending in October 2013, national BHPH retailer America’s Car Mart reported sales revenues of $98.2 million on goods acquired at a cost of $56.2 million. That is a markup of 74.7 percent. By way of comparison, national used-car retailer CarMax reported quarterly car sales revenue of $2.77 billion on goods purchased for $2.39 billion. CarMax has a 16 percent mark up.
Thus, while requiring dealers to acknowledge their high mark ups is somewhat without precedent, it is also fairly well-founded.
The other feature in the bill focuses on a common collections practice. Under the new rule, dealers are prohibited from installing GPS-enabled devices in order to track the location of financed vehicles without advising the buyer beforehand. Some of these products come with services that send four updates per day on the location of a car. They can even come with geo-fence alerts which will warn a dealer if a car goes beyond a defined physical boundary.
The same rule applies to the use of starter interrupters. Starter interrupters can be used to disable an ignition remotely.
The legislation was passed in the fall but went into effect on January 2nd.