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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP®

UPDATED: Jun 27, 2012

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Back in January 2012, Sen. Ted Lieu proposed new legislation that would regulate “buy here pay here” auto dealerships, which are notorious for selling high-mileage cars to low credit borrowers. That bill went through the Banking and Finance Committee this week, passing with a 7-2 vote.

The bill, more formally known as SB 956, has set out to cap interest rates on auto loans originated by buy here pay here dealers at 17.25 percent.

Under current law, buy here pay here auto loans can carry rates upwards of 30 percent.

Buy here pay here dealerships operate by originating financing on the premises, allowing buyers to walk onto the dealership, pick out a vehicle, and finance it on the site without having to wait for a third-party lender’s approval.

As a result, these dealerships have the freedom to approve poor credit borrowers for an auto loan.

The problem, however, is that buy here pay here locations are often the only means for bad credit borrowers to obtain auto loans for a vehicle—and these dealerships know that.

“A buy here pay here used car dealer is a subset of used car dealers where they will prey on the vulnerable and poor by making you show up every month to make your payment, and if you don’t do that then they will immediately repossess your car,” said Lieu in a recording on his website.

These unreasonable payment methods aren’t the only criticized practices that buy here pay here dealerships commit.

“They also mark up the cars up to 200 to 300 percent above Kelley Blue Book values,” said Lieu. “So these are really the worst of the worst in terms of predatory used car dealers, and they’re not regulated.”

Consider the story of one 58-year-old restaurant manager named Debbie Acevedo whose situation perfectly illustrates Lieu’s statement. As reported by the LA Times, Acevedo bought a 2005 Ford Taurus from a buy here pay here lot in Visalia, California. Under the terms of her deal, she’s required to drive to the lot every two weeks to make a $180 auto loan payment in person. She’s required to make this bi-weekly trip for four years—at the end of which she will have paid more than $18,000. That’s four times the Kelley Blue Book value of the vehicle at the time she purchased the car.

SB 956 is attempting to remedy situations like Acevedo’s by not only capping the auto loan interest rates that these dealerships can charge, but by also attempting to force buy here pay here dealers to obtain a California Finance Lender’s license.

Additionally, these dealerships will need to grant borrowers a grace period before repossessing vehicles, if SB 956 becomes law.

Sen. Lieu has posted a fact sheet summarizing SB 956 on his website.