Buy Here Pay Here: Paying Cash for Clunkers

With A Nod to the New York Times

Kudos to NYTimes for an excellent article on BHPH. You may well ask what the heck is BHPH? – well, it’s part of the financial network to which families living close to the edge resort, alongside provders of payday loans and [car] title loans. It’s particularly poignant, because it’s one of the first sectors to be hit by tariffs, and is the real-world side the interaction of new and used car demand about which I’ve already written. It’s where tariffs are causing the rubber to lose its grip on the road.

BHPH Overview

You need wheels to get to work, right? And to shop, to go to the doctor, to do ‘most anything. In urban areas you can resort to Uber and Lyft – in conversations with drivers, they have regulars who use ride hailing to get to their minimum wage jobs.¹ It’s steep to pay $15 each way when the job only pays $15 after taxes,² but owning a car is also expensive.

So let’s say you don’t live in an area where Uber is reliable, which (geographically) means most of the US. After all, there are few people driving in suburbia, where most people have their own car, where residential density is low, and where for the driver the dead haul between rides is in miles. But there are apartment buildings and even trailer parks, and fast food restaurants and receptionists and other entry-level jobs. (OK, that’s pure spin: low wage jobs.) At the same time, nothing is in walking distance – getting groceries can require going a few miles, getting to a doctor the same.³

To live, you need wheels.

Now if you’re young, you’re not likely earning much. You don’t have much credit history, and you may have racked up some credit card debt that you have a hard time paying off each month. You started out in a nice apartment, but quickly realized you couldn’t afford it, utilities and rent and a landlord who insisted on seeing your rental insurance policy. So you fell behind and got evicted. If you’re young and a mother, this financial stress pushed the father to seek an easier life; multiply the difficulties.

Now if you go to a standard used car dealer,⁴ they are carrying inventory that’s $12,000 and up, and want $3,000 down. Of course before showing you much, they chat a bit, and it becomes mutually obvious that you can’t afford what’s on their lot, and with your credit history you can’t take out a loan. You walk on the the next dealer, and the next. You come to one that’s BHPH.

They’ll give you a high-mileage car for $1,000 down, a better one for $3,000 with payment twice a month, in cash, at an effective interest rate of 29%.⁵ Now lest you think that’s extortion, default rates are high, and repossessions require paying someone to find and return the vehicle, which will certainly be more used that before the customer drove it off the lot. In the New York Times case study, the dealer also shouldered many of the normal maintenance and repair costs. In addition, they take on debt to acquire cars, and have to pay their bank for a car when it is sold. Unlike a regular dealer, they don’t recoup what they paid when they sell the car, and run the risk that cashflow from loan payments doesn’t cover their outflow, even when their income gets the occasional boost from reselling a repossessed car. A run of bad luck, and BHPH dealer will run through the equity they have in the business.

The image is of a business of saints and sinners, the owners who lean over backwards to keep desperate customers in their cars, and hard-nosed SOBs who don’t mind repossessions because their cashflow is fine and they profit by selling the same car again and again. (I’m not actually encountered the latter type of owner, but my sample size is small – while many of my “drives” were bought used, I have never had to go to a BHPH store for one.)

The Tariff Connection

While “Clunkers Burning Cash” may not have been a great title, the Times article illustrates exactly that: used cars are becoming more expensive, and that hits those without much cash or income the hardest. Furthermore, tariffs are driving up repair costs, because many, if not most, aftermarket parts are imported. It’s not a one-to-one relationship, because what a repair shop pays includes shipping and other distribution costs that aren’ directly linked to the cost an imported part at the border.⁶ Nevertheless, for households living on the edge, or for BHPH stores struggling to keep their “floorplan” loans current, any cost increase matters.

Summary

As an economist, I have fun untangling interactions among the various pieces of the auto industry. Higher car costs aren’t just an intellectual curiousity: they hit poorer households hard. Rockbridge County wasn’t a great place to farm, the names say it all. By 1800 settlers were moving on to greener pastures, which weren’t hard to find – almost anywhere west looked promising. Sam Houston was one such, as were the McCoys of Hatfield-McCoy fame, who didn’t make it that much futher west. The local United Way focuses on the unfortunately large ALICE community (Asset Limited, Income Constrained, Employed, the working poor). There are no taxis in rural areas such as mine, so having “wheels” is essential for daily life. Tariffs will hit my neighbors hard.⁷

1. I thank BWG Strategy for inviting me to their closed-door [conference call] meetings that include drivers from around the country. Drivers also note a regular run is taking people to vape shops.

2. Those on minimum wage pay no income tax, but they have to pay into Social Security and Medicare from the first dollar earned. At the other end, earn a high enough wage, and you no longer have to pay anything additional into Social Security. Better (if you have a high incvome), you can itemize deductions to write off mortgage costs and charitable deductions, and take benefit from tax credits such as the $7,500 that is still available for many EV purchases and leases. All those are irrelevant to those on minimum wage.

3. It’s 6 miles from where I live to Walmart, the closest grocery store / retail outlet, if I ignore the horse trailer store, the new Farm Coop small store, and Waffle House, which are all close to the local Walmart. BTW I prefer Food Lion over Wally World and Krogers, the other options. It’s 8.3 miles away. No sane (and few less than sane) individuals bicycle to where I live. Six miles one-way is a long walk…

4. See the National Independent Auto Dealers Association for newsletters and other information, including regional and national conferences. While most of their membership are mainstream used car dealers, they’ve publish BHPH Dealer Magazine since 2016. There is also the National Alliance of Buy Here Pay Here Dealers.

DriveTime is to my knowledge the only national-level BHPH player. See the DriveTime Wikipedia entry for perspective. Wikipedia also has an entry on BHPH.

5. I spent a couple afternoons at a BHPH dealer who had a 3-tier system. People started at 29%, if they kept paying on time they dropped the rate to 19%, and if they were a reliable repeat customer, they could be charged as little as 9%. That however was in a period when the dealership’s loans were at a low interest rate, so today the bottom tier may be higher.

6. The costs of carrying inventory at Advanced Auto, AutoZone or NAPA does go up with value, and tariff-induced inflation will keep the Fed from dropping rates even if the FOMC doesn’t want to openly defy Administration hostility by voting for a rate increase. [OK, there’s also O’Reilly, but they don’t have a store in my rural area, whereas Advanced was founded in Roanoke, just down I-81 from me. Their HQ is now in North Carolina, but they’ve taken over a defunct mall in Roanoke and converted it to a training and operations center so maintain a significant presence in their hometown.]

7. Mea culpa: I am currently the Treasurer of the local United Way of Rockbridge, and support the Blue Ridge Area Food Bank and the Rockbridge Area Transportation System, founded by the late Joan Manley, a quadraplegic, to provide transport to the many in the community who can no longer drive. RATS is the difference between life and death for a portion of the locak population who need dialysis three times a week. They don’t have the capacity to provide regular taxi services – the last local taxi company closed years ago, and there is no reliable Uber service.