Interest rates for most purchases in Florida are capped at 18 percent, but lawmakers made an exception for used cars more than four years old – resulting in rates as high as 30 percent, in some cases.
Subprime borrowers – those with credit scores below approximately 650 – are finding themselves saddled with those high rates after being lured to used car lots that advertise with such claims as “no credit – no problem” and “we finance anyone.”
Asked what kind of interest rate a buyer with a credit score below 500 might expect, one salesman told a Team 6 Investigators producer and photographer, “We’re maybe talking about 15 percent, 20 percent.”
Another said the rate would be “between 5 and 15, 17” percent.
That’s the kind of rate bait that 65-year-old Ray Sparkes, of Dania Beach, said convinced him to sign a deal for a used car.
But he later learned the 7 percent rate he said the dealer quoted him was not legally binding. After one lender quoted him 14 percent he took the car back to the car lot, but wound up with a rate of 27.55 percent.
With that, Sparkes – an underemployed accountant and former chief financial officer -- entered the booming ranks of subprime auto loan borrowers.
Nova Southeastern University economics professor Albert Williams said the number of such loans has doubled since 2009.
A used car rate of 30 percent, he said, is “almost like loan sharking,” but with one important distinction: the rates are legal.
Unlike the crash of the trillion-dollar housing market, which wreaked havoc on the world economy six years ago, the $70 billion subprime auto loan market is not going to burst with a similar effect, Williams predicted, calling it a “mini-bubble.”
But he said regulators – who failed to intercede in the markets to prevent the bubble that touched off the Great Recession – are not doing enough to protect some borrowers from the subprime auto bubble.
“The regulators have not come into the picture as clearly as I’d like at this point in time,” Williams said. “You know there are people who should not be given a loan. I think the bankers and financial institutions are betting that if you can’t pay I come back and take the car. (14)
Sparkes, like so many others in Florida, said he had no choice: he needed a car.
Here are some tips to help you when you're looking for a car:
- Ask for a loan from a bank or credit union. The federal Consumer Financial Protection Bureau says the interest rate offered by the dealer may be higher than what you can obtain by taking out a loan directly from a bank or credit union. In general, dealers and lenders are not required to offer the lowest interest rates available. You may be able to save a lot of money over the life of the loan by negotiating the interest rate with the dealer.
- Go car shopping armed with that information: the rates and terms you can get on your own
- Obtain your credit score
- Review credit report for inaccuracies and correct any
- Lower your auto ambitions: choose a cheaper, older, not-as-nice car as you would prefer
- Look for GPS devices that are now being placed onto cars for buyers in the subprime market or with higher interest rates.