How Car Dealers Take Advantage of People with Bad Credit
07 Oct, 2018 / By Jennifer Hamilton
Buying a car can be a stressful event for those with limited means. In particular, the fear of not qualifying for a loan, or it being too expensive, will drive people to look at questionable dealerships promising to work with anyone, regardless of credit history. The problems with these companies all lie in the fact that they profit off of interest, rather than the car themselves.
High Interest Rates
People with poorer credit do not qualify for lower interest rates. Car dealerships know this, and specifically target those with the poorest credit possible. In the event that they cannot pay, the car is repossessed and then resold to another person. It is possible for the same car to be passed around a dozen times, all the while earning a great deal of money for the dealership.
Poor Quality Cars
These dealerships follow the mantra, “Buy low, Sell high.” They will go to auctions and pick out the worst of the worst. From there, the bare minimum needed would be spent making it appear road worthy.
Higher Mark Ups
This was touched upon in the previous section. A car dealership that preys upon the poor makes its money off of interest. To make a large amount of interest, three things are needed: a long loan life, high interest rates, and a high initial principal. Each part of the equation has its own role to play in creating the perfect storm, a loan that the borrower is unable to escape from.
The higher cost serves an additional purpose. Since the company derives the majority of its profits from the interest charged on the loan, it does not want the borrower to be able to refinance the loan elsewhere. The best way to do this is to make the loan larger than what the car is actually worth. When this happens to a home, it is known as “going under water.” For a car dealership, this is known as making a decent profit.
The only way to beat these dealers is to not allow them the opportunity to profit off of you. Go in with the tools needed to understand the real worth of the car, and negotiate down the interest rate and loan term. That is the only way to protect yourself from these people.