Sub-Prime Loan a Mixed Blessing for Folks in Need

After her Ford Escort died, Dionne Bruno needed another car to get her from her home in Carson to West Los Angeles, where she worked as a judicial case manager.

Bruno, 34, knew financing would be tough; a recent divorce had left her with “very bruised” credit. So instead of heading to her bank or a credit union, she visited car lots with signs that said: “We finance anyone.”

Not quite, Bruno found. “They didn’t finance me.”

Then she heard of a concept new to her: the high-risk or “sub-prime” auto loan market. Lenders who specialize in sub-prime loans serve consumers who are deemed poor credit risks, helping them to buy cars or homes or to consolidate their bills. The practice isn’t new, but the industry grew tremendously in the 1990s, fueled by the growing willingness of mainstream banks and Wall Street to finance the companies.

Bruno visited a car lot in Torrance.

“They approved me on the spot,” she recalled. Soon, she was driving her 1996 Kia Sephia home and to work. Never mind that it had 71,000 miles on it or that her payments, spread over three years and due twice monthly, were $151.70 a pop. Or that her loan carried a staggering 29.9% annual percentage rate.

To consumers desperately in need of a car, sub-prime loans can be a godsend, a second chance, a way to prove themselves credit-worthy once again. A history of on-time payments may be all that is needed to help them qualify for a better loan next time.

“We don’t expect repeat customers,” said Herb Patterson, general manager of the Torrance Ugly Duckling lot where Bruno got her Sephia.

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But consumer advocates warn that these loans can be hazardous to customers’ financial health--and risk leaving them even less credit-worthy if they take on too much and are unable to make the payments.

The high interest rates--which lenders say are justified because of the credit risk--are just one of the issues that trouble consumer advocates. They also question lenders’ common practice of offering auto club memberships, life insurance and other extras the consumer might not need, then folding them all into the package at the same high interest rate.

Critics say sub-prime lending can quickly become predatory lending. Caution is the byword, said Gene Marsh, a professor of law at the University of Alabama in Tuscaloosa who has testified before Congress on the issue and has represented both customers and lenders in court disputes involving sub-prime auto loans.

Sub-prime lending “is not inherently evil,” Marsh says, but he adds that consumers must go into such arrangements with their eyes open--and with some research under their belts.

Before turning to a sub-prime lender, customers are advised to check in with their own bank or credit union, or shop other banks, to see if they might qualify for a better deal, even if they assume their chances are dismal.

If sub-prime proves to be the only possibility, consumers can still be smart shoppers, Marsh says.

“Don’t buy the bells and whistles,” he advises sub-prime customers. Among the popular offerings, he said, are disability insurance, life insurance, extended warranties and road service.

These packages, he said, are offered to “people who can least afford ‘dead weight’ on their loans.” He advises carefully evaluating whether the extras are needed and whether they duplicate existing coverage.

Bottom line: “Buy the car, and get out of Dodge.”

Before completing a deal with a sub-prime lender, Marsh suggested doing some simple research.

“Make sure you are not overpaying for the car,” he said. “Some dealers will sell at an inflated price and pretend to give you a lower interest rate.”

It’s easy enough to check: Most public libraries have the Kelley Blue Book, which includes retail and trade-in prices for used cars and trucks. Or consumers can go online to a variety of Web sites, such as the Kelley site, https://www.kbb.com, or CarPrices.com, https://www.carprices.

Sub-prime interest rates vary greatly among lenders, so it pays to shop around, Marsh said, noting that he has seen rates as high as 48%. Typical sub-prime rates across the country are now in the mid-20% range, he said.

Consumers should go armed with other rate information as well.

“Open the Saturday and Sunday paper and you can get a feel for prices [charged by conventional car dealers],” Marsh said.

A recent classified section in The Times, for instance, advertised interest rates for new cars as low as 0.9% but also at 4% to 6% and higher. Bankrate.com, a Web site that tracks interest rates nationally at https://www.bankrate.com, reports that new-vehicle loans average 9.15% nationwide for a four-year loan.

Despite the high interest rates, sub-prime auto lenders fill a huge need, said Greg Sullivan, chief executive of Ugly Duckling Corp. The sub-prime lender operates 75 dealerships in greater Los Angeles and elsewhere in California, Arizona, Nevada and five other states, and provides online loan applications and other services at https://www.uglyduckling.com.

Among his typical customers, Sullivan said, are recent immigrants trying to get established, the newly divorced who have recent “credit issues” or those who have had a brief history of unemployment or other bad luck.

A typical car or truck sold by Phoenix-based Ugly Duckling is 4 to 7 years old, has 80,000 to 100,000 miles on the odometer and costs about $8,200.

The typical customer, Sullivan said, puts about 10% down and takes out a 34-month loan, with payments of about $315 a month.

Bruno, who recently moved to Riverside, plans not to be a repeat customer once she is ready to trade in her Kia but instead to move on to conventional financing. For her, the high interest rate was tempered with goodwill. Soon after she bought her car in January, she said, she was hospitalized with meningitis.

“They deferred my payments for two months,” she said, “without any extra charges.”

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Good Carma is a guide to automotive-related health and consumer issues. Kathleen Doheny can be reached at kdoheny @compuserve.com.