Ryan owned two cars — a 1996 Honda he purchased for $6,000 and had driven for two years, and a 1989 Ford Mustang.
The Honda had a leaking radiator and needed $2,000 in repairs and the Mustang was sitting behind his house and headed for the junkyard.
Ryan got rid of both and purchased a 2004 Nissan with 16,000 miles for $12,000, but he had to wrap into the loan $3,000 he owed on the Honda. He found himself paying for both the Nissan and his “upside-down” Honda $450 per month for five years with an interest rate approaching 15 percent.
The website Bankrate.com defines an “upside-down” auto as meaning “owing more on a car than its worth.”
Ryan, who asked that his real name be withheld, says advertisements promising to pay off his old car loan and get him financed for a new one got his attention.
“‘We’ll get you in as long as you have a job,’” said Ryan, quoting the ad. “It helped them more than me, let’s put it that way, with the interest rate they tagged me with.”
John Walters and his wife Laura counsel for Community Credit Counseling Specialists, Inc., a non-profit organization with offices in East Toledo.
“When someone says they will finance anyone, that is a red flag to start with,” said John Walters. “Even if you don’t have a high interest rate when you turn your car in early; you’re still going to get burnt.”
“The psychology of it is — if they approve it, I can afford it,” said Walters. “That’s not true. Just because a bank or finance company approves a loan doesn’t mean you can afford it.”
“You’re still adding a liability on top of the new car, which depreciates fast enough anyway,” added Walters. “You’re between a rock and a hard place on that.”
Walters suggests buyers should get their money up front from a credit union, a local bank in the form of a personal loan; or approach the finance company that money is owed to on the upside-down car.
“It’s a step in the right direction,” admitted Walters. “Even if you’re not in a bad situation, anytime you go to buy a car, in my opinion, go to pre-finance first. You know everything before you walk into the dealership,” suggested Walters.
Good Credit Saves
Having good credit can save thousands of dollars. According to Money in Motion, published by the American Center for Credit Education, a good credit rating on a car loan of $25,000 over five years can save up to $9,375 in interest payments.
A credit score of 720-850 can bring a five percent annual percentage rate and total interest of $3,359. A credit score of 500-589 can bring interest rates up to 17.6 percent, a monthly payment of $629, and total interest adding to $12,734, for the same car.
Ron “R.J.” Rowland, owner of RJ’s Auto Sales on Woodville Road, can get you into a new car, but R.J. checks credit.
“What it boils down to is they have to have good credit and a down payment. That’s it. There is no way of helping someone if they don’t,” Rowland sighed.
On the other hand, if you’re credit is bad, buy here, pay here dealerships will finance anyone. At J.D. Byrider, financing and warranties are both provided through in-house companies. The Carmel, Indiana based company was founded in 1989 and today has a network of 124 dealerships in 28 states.
Every month, more than 5,000 people bring their business to J.D. Byrider. Since 1989 the company has sold more than 555,000 vehicles. In 2003, buy here, pay here sales reached $63 billion, accounting for more than half the car sales in the U.S.
Woodville Auto Finance is another buy here, pay here dealership, but charges no interest and gives the buyer two years to pay off the car loan.
“At other places, you have to go through a bank. The bank buys the loan and they pay the dealer some kind of payment,” said Ahmad Tawil, a salesman for Woodville Auto Finance, an independent dealership on Woodville Road.
“We deal with all kinds of customers,” said Tawil. “People who have money, people who don’t have money. We take a lot of risks.”
“They have to have a car to take their kids to school,” Tawil explained. “With no car, you cannot have a job. With a car, you can make money.”