British comedian John Oliver recently took aim at the rampant rip-off that currently takes place in the auto-lending sector with BUY HERE – PAY HERE loans. These are loans that make it easy to purchase a car on credit but with high interest rates and severe penalties for missing a payment or default. These are called “sub-prime auto loans”.
In the video, a woman asking for a maximum $3,000 car loan ends up on the hook for a $13,000 loan (paying around 30% interest).
One shows a purchaser who leaves her baby in the car, then the car is repossessed with the baby inside.
Another shows a 2003 Kia Optima car that gets loaned and repossessed at least 8 times, each time valued at 2-3x its previous estimate.
Right now, approximately 31% of subprime auto loans are currently non-performing. While auto sales are soaring, these practices are driving up the prices of used cars and ultimately leave most borrowers in a financial nightmare.
Listen carefully. A car depreciates in value and is should be considered on par with buying an appliance. You need something functional, reliable and that you can afford. To avoid borrowing, buy a cheap, out of style, used car that gets you where you need to go and then save money to upgrade to a better car only when you have the cash on hand.
I have been going through the used car buying process with my son for the past few months. We have looked at hundreds of cars online, test driven about three and had one evaluated by a mechanic only to learn the car, which looked great, needed $2000 of engine repairs. It takes time to find a good one, but we will not borrow money to buy a car. It is a bad idea and big financial mistake.
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