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Fundamentally Flawed? Edmunds.com Launches Debt-Free
Appeared June 2012 - volume 9 - issue 6 - page 8
Article has been viewed 2845 times.
Ran across the “Debt-Free Car Project” being conducted by Edmunds.com recently. The “project” has been heralded by members of the media as what subprime and unbankable consumers should do rather than purchase a vehicle from a buy here-pay here dealer.
Ronald Montoya, the Consumer Advice Editor for Edmunds.com, earlier this year wrote that consumers should forego the services of buy here-pay here dealers, save up $3,000 and purchase a used vehicle with cash. “Wouldn’t this be of far greater value to the consumer than purchasing a vehicle from a dealer at a high markup and high interest rate?”
We noted a number of issues with his premise, and invited Mr. Montoya to the Leedom Group 18th Annual Buy Here-Pay Here Convention this past April. We offered him as much information about the industry as he wanted. He took our offer, attended the event, thanked us for our hospitality and went back to California. To date, we have not seen one word published by Mr. Montoya about the convention he attended or what he learned at the event.
What we have seen is Edmunds.com’s Debt-Free Car Project. The premise is buy here-pay here consumers make $3,000 down payments and then finance the difference. If they have $3,000, Mr. Montoya reasons, why not just shop and purchase a vehicle for cash? He decided to try this himself. We assume with Edmunds.com cash, but his article doesn’t spell out who paid for the car.
First off, as Mr. Montoya notes, likely from his time at our convention, the average buy here-pay here customer makes a $792 down payment. I could no doubt do a poll of all you good dealers out there and find that perhaps 1-3 percent of buy here-pay here customers make $3,000 down payments. Few people, even people with 800 FICO scores, make $3,000 down payments.
Well, because Mr. Montoya knows intuitively that one cannot purchase a useful vehicle for $800, he opted to purchase a $3,500 vehicle. He determined this would get him a decent, dependable vehicle. How he determined the average buy here-pay here customer makes a $3,000 down payment to begin with escapes me, but he claims he did. So, of course, the first thing he did was opt to make a cash purchase of no more than $3,500, 16.5 percent more than $3,000. He purchased a 1996 Lexus ES with 135,000 miles from an independent dealer that was listed for $3,700. He negotiated and got an out-the-door price with taxes, registration and plates of $3,800.
Edmunds.com purchased a 16-year-old vehicle with 135,000 miles on it “as-is” (no warranty) for $3,800 including taxes, etc. Hmmm? Not bad.
The issue, and I can’t make this point more loudly, if a consumer needs a vehicle today to get to work, take the kids the doctor or go to the store, and doesn’t have $3,800 like Mr. Montoya, what do they do?
Well, a typical buy here-pay here deal has customer make $87.50 weekly or $175 bi-weekly payments. To save up $3,800, the consumer would have to put that money away for 43.4 weeks or roughly 11 months. How they go about being gainfully employed during the interim is something Mr. Montoya, the Consumer Advice Editor, never addresses.
Let’s see how a buy here-pay here deal may have looked.
First off, the typical buy here-pay here dealer would never have sold a consumer a 16-year-old vehicle with 135,000. The likelihood of the vehicle lasting three years, the typical duration of the retail installment contract, is very slim. Also, the dealer would not have opted to sell a 16-year-old Lexus ES 300. The transmission alone on the vehicle, were it to go south, is $3,000 to replace.
A more reasonable selection may have been a 2002 Ford Taurus or 2002 Buick Century or similar vehicle. Remember, most dealers have a Do Not Buy List, because of common mechanical failures and/or high repair costs. The typical vehicle sold by today’s buy here-pay here operator is a 10-year-old and younger with 100,000 miles or less. Those vehicles, at today’s auction prices, run anywhere from $4,500 to $5,500. Dealers must make sure the inventory they sell will last the life of the finance contract and longer to protect their investment and mitigate the risks.
So to start with the buy here-pay here dealer already put at risk a $5,000 vehicle. He or she will then spend, on average $600 to recondition that vehicle. Remember, this is an at-cost price. Consumers would likely pay double that for the same level of service. That means the dealer will replace what’s necessary: brakes, windshield wipers, tires, battery, struts, etc. It’s part of doing business. Most states require vehicles pass a minimal safety inspection and in many states the vehicle must pass an emissions test as well.
We don’t know if the 1996 Lexus ES 300 Mr. Montoya purchased passed a safety and emissions inspection. Typically proof is required before the vehicle can be legally plated.
Now, the buy here-pay here dealer has $5,600 into the vehicle, but we haven’t worked out his costs or “overhead.” This includes his building and lot expenses, telephone, electricity, heat, water, sewer, gasoline, insurance, personnel, health care and other employee benefits. Also, most dealers borrow money to run their operation, so in addition to overhead costs interest expenses involved in financing the operation must be added in. Typically, it costs the dealer roughly $2,000 to put that vehicle on the lot for sale, excluding collections costs. Now, we are at $7,600. That is real dollars spent to bring that vehicle to market. Dealers will usually mark the vehicle up, not like Starbucks marks up 59 cents of cup and coffee for $3.50, but a mark up nonetheless and then adds in interest on financing the vehicle for the customer. All this is done in an attempt to earn a “profit” while at the same time providing a valuable and useful service.
So, for $800 or less a consumer gets a vehicle today, not 11 months from now. They also get a vehicle six years younger than what Mr. Montoya purchased and it will typically have at least 35,000 fewer miles. Unlike Mr. Montoya’s Lexus, it will most likely come with a warranty. Don’t forget the typical dealer will not only spend $600 on recon, they will also spent $300 in good will warranty work in the first 12 months of the finance contract.
We have asked Mr. Montoya for the VIN number of the 16-year-old Lexus, so we can follow the repair history via Carfax. Good luck Edmunds.com!