This story is Part I of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part II here.
In the summer of 2013, Mary McDuffie Morton, 31, needed money to buy a car. At the time, the recently divorced mother of four had a poor credit history. So she was excited to hear she could get a subprime loan at a used auto dealership in Bronx, N.Y.
“It [seemed] too good to be true,” Mary recalls. “As long you have a job, you’re approved. It’s like wow, OK, I’m guaranteed approval.”
Nationwide, customers like Mary owe more than a quarter-billion dollars in high-interest, high-risk subprime auto loans. A recent report by Moody’s Investors Service found that Santander Consumer USA Holdings Inc., a major originator of subprime auto loans, has been slacking when it comes to verifying the income reported by loan applicants, according to Bloomberg. This can make it easier for car buyers to take on more debt than they can afford to repay.
But big banks aren’t the biggest problem in auto lending. About three-fourths of subprime auto loans do not originate in banks or credit unions. Instead, they are often signed at car lots like the one in Bronx, N.Y., where Mary was lured by the promise of easy credit.
In many cases, those customers are taken for a ride by predatory dealerships and finance companies alike.
“Their main job is not to care for you. It’s to care for their pocketbook, and that’s all they’re there for,” says Remar Sutton, a former car dealer turned consumer advocate.
“How many of you have seen the ads that say, ‘No credit, bad credit, no worries, we’re the credit fixer’? That is not why those ads are running. Those ads are running because they know if you think you have bad credit, you will pay anything for a car, and they’ll knock a home run on you,” warns Sutton.
That’s what happened to Mary. To buy a used 2003 GMC Envoy XL, the dealer told her she needed to first borrow roughly $7,000.
“The dealership told me they were going to shop around for lenders for me – and they were going to call one and get back to me,” Mary says.
The dealer selected Dependable Credit Corp. of Yonkers, N.Y. The interest rate on Mary’s loan was a whopping 24.9% – just one-tenth of a point below the threshold of criminal usury in New York State.
Mary signed the contract, despite an interest rate so high that it was nearly illegal.
“I was scared that if I didn’t go along with that deal, I wouldn’t get a car, ” she says.
The Secret Bonus
Like many lenders that work with auto dealers, to get business from dealers, Dependable offers them a secret bonus. It’s called a “Dealer Reserve Advance,” and it can add an extra two points of interest to the consumer’s loan. The dealer keeps 70% of it as a reward for making the referral to the finance company.
“When you go into that dealership, do you think they’re going to point you in the direction of a cheap loan? Of course not. They’re going to send you to the finance source that will pay them cash up front on the loan,” says Sutton.
Dependable executives did not respond to multiple requests for an interview or comment.
On its website, the finance company claims it does business with 250 used car dealers in seven states – Massachusetts, Connecticut, Pennsylvania, New Jersey, Delaware, Maryland, and New York – and has financed more than $200 million in loans.
“They’re in hundreds of dealerships because they’re making millions of dollars, because people who are poor, people who are worried about their credit, are being taken advantage of by that business,” says Sutton, a co-founder of FoolProof, a nonprofit website devoted to consumer education.
Mary said the vehicle she purchased had mechanical problems that the dealer refused to fix. Sensing that she was being cheated, the former Bronx resident refused to make loan payments until she received a title proving she owned the car.
“They sold me a lemon,” complains Mary. “I knew that the deal was just a big scam.”
A Long Fight in Court
Dependable repossessed the Envoy when Mary’s payments were five weeks delinquent. By the time she received the title, the car was gone – and she was thousands of dollars in debt.
According to records obtained by MagnifyMoney, the finance company sold the vehicle to an undisclosed owner for $4,200 – a price that was $5,000 less than what Mary paid just four months earlier.
Then Dependable sued her in Bronx County Civil Court for a bill packed with extra charges. The tally includes nearly $1,200 in repairs by Westchester Auto Center and more than $1,700 in storage fees charged by Saw Mill River Realty.
The three businesses are located at the same address. State records show that all three share the same chief executive.
Dependable continues to charge Mary 24.9% interest on a loan for a car it repossessed and sold to someone else three years ago. Last year, the company told the court Mary owes nearly $11,000.
“Unfortunately, most places that want to make you a subprime loan simply want to make more money on you,” says Sutton.
With the help of a legal aid group, Mary is countersuing. She alleges she was cheated through deception and illegal business practices by the finance company and the dealer.
In a counterclaim filed by Mary’s attorney, Shanna Tallarico with the New York Legal Assistance Group, in October 2016, Mary claims that the dealer also required her to trade in her 2004 Cadillac CTS in order to purchase the used Envoy. The dealership agreed to give her just $1,900 for the vehicle, citing “a significant problem with the Cadillac’s engine,” according to Mary’s counterclaim. Days later, she claims the dealership listed that same Cadillac for sale for $9,999.
Efforts to reach the dealer for comment were unsuccessful. Mary’s case is still pending, Tallarico says.
“I felt like I had just thrown money in the garbage,” says Mary. “The whole experience was a waste of money.”
How to Buy a Used Car Without Being Cheated
Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.
Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that. You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.
Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.
Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.
And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.
Additional reporting by Mandi Woodruff