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'Buy Here, Pay Here' Businesses Move Into Leasing


A couple of months ago, we heard on this program about the proliferation of buy here, pay here used-car dealerships. Ken Bensinger, of the Los Angeles Times, reported on dealerships that don't just sell cars; they also make the loans to pay for them. They're often the only dealers where people with bad credit can get a car. Interest rates are high, repossessions are common, and a single used car can be a cash cow once it's sold multiple times.

Recently, Bensinger did a follow-up to that investigation - how buy here, pay here dealers handle used-car leasing. And he joins us now from Los Angeles. Welcome back to the program.

KEN BENSINGER: Thanks for having me, Robert.

SIEGEL: And first, what have you found about how common it is for these dealerships to get into leasing used cars, either in addition to or instead of selling them?

BENSINGER: It's a much newer business model. It's probably only about five or 10 years old in most parts of the country, and the numbers aren't very specific. But the largest company that offers insurance to these dealers told me they have about 2,500 dealers, I think, operating now. And that's up almost double in the last three years.

SIEGEL: Well, from the dealer's standpoint, what's in it to lease a car to me? Let's say I'm a buyer. What's in it to lease to me as opposed to sell it to me?

BENSINGER: Well, dealers sort of invented this idea of leasing used cars. And I should add that new cars have been leased for decades, but no one ever wanted to touch used cars until some of these low-end, used-car dealers figured out that by leasing rather than selling cars, they gained all kinds of advantages over the consumer.

They found it was easier to repossess them. The rules protecting assets in bankruptcy did not apply to these. Rules capping interest rates in different states also did not apply. And they found that there was tax advantages on both on state and federal income taxes, and sales taxes.

SIEGEL: You mean, the difference being here that title doesn't actually change hands, and the amount of the lease is not technically an interest rate?

BENSINGER: That's exactly right. And if you do the math on these leases - there's no interest rate stated on the contract. But if you do the math, you'll see interest rates typically around 35 to 45 percent.

SIEGEL: Thirty-five to 45 percent?

BENSINGER: That's about right.

SIEGEL: Well, let's assume that I'm a buyer. I have no money, no credit, and I want to buy a car. Would I have to make a down payment, typically, to buy - an old Toyota, let's say?

BENSINGER: To buy an old Toyota, you'd have to make a down payment. To lease it, you'd have to make what they might call an origination fee, or an application fee, or a security deposit. And the difference is that that doesn't go towards your ownership of the car. That's simply a fee that the dealer can pocket.

SIEGEL: I've always thought that one advantage of leasing - which I have never done with a new car - is that you lease it during the period of the early years of the car's life. It's less likely to need big repairs than if you leased, say, a 5-year-old car. The company you're taking the lease from would be responsible for servicing it. Is that the case here?

BENSINGER: No. These cars - there's no guarantees as to their condition. And many contracts actually require the customer to maintain it themselves, and frequently require them to do the maintenance at the maintenance operation owned by the dealership.

SIEGEL: Well, trying to look at this from the consumer's standpoint, does the consumer who leases - as opposed to buys - from one of these dealerships, is there any advantage at all?

BENSINGER: Well, the consumer who's attracted to these typically is interested because it's easy to get off the lot with not a lot of up-front money. The down payments tend to be slightly lower than buy here, pay here down payments. And so they think, simply, how much cash do I have in my pocket today, and what can I drive off the lot with?

They think that way because they desperately need a car to get to work. Let's remember that this is an industry that looks for people who need a car. They aren't luxury items; these are tools that are utterly important for getting and holding down a job. The monthly payments in these leases tend to be the same or higher than in buy here, pay here loans. That's at contrast with new car leasing, where leasing tends to be cheaper on a monthly basis.

And the worst part is, at the end, you still don't own the car. You have to make a huge balloon payment if you actually want to own it.

SIEGEL: Ken Bensinger, thanks for talking with us once again.

BENSINGER: It's been a great pleasure.

SIEGEL: That's business reporter Ken Bensinger, of the Los Angeles Times. Transcript provided by NPR, Copyright NPR.