The Working Poor: A Mainstream Financial Institution’s Choice Target
How Institutions and The Auto Industry Are Taking Advantage of People The Legal Way 
In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge. Federal Reserve data show that in relative terms, that debt is getting more expensive. In 1989 households earning $30,000 or less a year paid an average annual interest rate on auto loans that was 16.8% higher than what households earning more than $90,000 a year paid. By 2004 the discrepancy had soared to 56.1%. Roughly the same thing happened with mortgage loans: a leap from a 6.4% gap to one of 25.5%. “It’s not only that the poor are paying more; the poor are paying a lot more,” says Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. The liquidity lapping over all parts of the financial world also has enabled the dramatic expansion of lending to the working poor. CompuCredit Corp., for instance, aggressively promotes credit cards to low-wage earners with a history of not paying their bills on time. The recent furor over subprime mortgage loans fits into this broader story about the proliferation of subprime credit. In some instances, marketers essentially use products as the bait to hook less-well-off shoppers on expensive loans. “It’s the finance business,” explains Russ Darrow Jr. of J.D. Byrider Systems Inc., used car franchisee in Milwaukee. “Cars happen to be the commodity that we sell.” In another variation, tax-preparation services offer instant refunds, skimming off hefty fees. Attorneys general in several states say these techniques at times have violated consumer-protection laws.
Some economists applaud how the spread of credit to the tougher parts of town has raised home- and auto-ownership rates. But others warn that in the long run the development could slow upward mobility. Wages for the working poor have been stagnant for three decades. Meanwhile, their spending has consistently and significantly exceeded their income since the mid-1980s. They are making up the difference by borrowing more. Nearly half of Byrider sales in Albuquerque do not result in a final payoff, and many vehicles are repossessed, says David Brotherton, managing partner of the dealership. Byrider dealers say they can generally figure out which customers will pay back their loans. Salesmen, many of whom come from positions at banks and other lending companies, use proprietary software called Automated Risk Evaluator (ARE) to assess customers’ financial vital signs, ranging from credit scores from major credit agencies to amounts spent on alimony and cigarettes. Unlike traditional dealers, Byrider doesn’t post prices (which average $10,200 at company-owned showrooms) directly on its cars. Salesmen, after consulting ARE, calculate the maximum that a person can afford to pay, and only then set the total price, down payment, and interest rate. Byrider calls this process fair and accurate; critics call it “opportunity pricing.”
Last year, net income on used cars sold by outlets Byrider owns averaged $828 apiece. That compared with only $223 for used cars sold as a sideline by new-car dealers, and a $31 loss for the typical new car, according to the National Automobile Dealers Assn. Nationwide, Byrider dealerships reported sales last year of $700 million, up 7% from 2005.
Dealers now post prices somewhere on their premises, though still not on cars. Doing so would put them “at a competitive disadvantage,” says CEO James Devoe. Sales reps flip through charts telling customers they have the right to know prices. Even so, Devoe says, buyers “talk to us about the price of the car less than 10% of the time.”
People are being encouraged to live beyond their means by companies that are preying on low-income consumers. Mainstream financial institutions are helping to fuel this explosion in subprime lending to the working poor. Wells Fargo & Co. (WFC ) and U.S. Bancorp (USB ) now offer their own versions of payday loans, charging $2 for every $20 borrowed. Based on a 30-day repayment period, that’s an annual interest rate of 120%. Once, major banks and companies avoided the poor side of town. “The mentality was: Low income means low revenue, so let’s not locate there,” says Matt Fellowes, a researcher at the Brookings Institution in Washington, D.C. Now, he says, a growing number of sizable corporations are realizing that viewed in the aggregate, the working poor are a choice target.
Much of these problems are also bue to the fact that many ignorant Americans who just wont take the time to learn about what they’re getting themselves into. “I don’t know whether I was more bothered by the ignorance of the customers or by the company taking advantage of the ignorance of the customers,” says Kehinde Powell, who worked during 2005 as a preparer at Jackson Hewitt, a tax prep firm that soaks up fees not just by preparing returns, but also loaning money to taxpayers too impatient or too desperate to wait for gov’t returns.
May 31st, 2007 at 4:49 pm
Just a few tips From a Sales Consultant who works in a “One Price” Honda Dealership:
I am starting to see a LOT of people being fooled by low car prices dealers are telling people just to get them in the door, only to find that after everything is said and done….after the paperwork is signed and you are now a new (to you) owner of a vehicle….that they have Financed anywhere from 500.00 to 4000.00 ( ) more than they should have!!!!!!!!!
Remember ….it DOES NOT MATTER what the PRICE of the CAR is…..all that matters in comparrissons is what the DRIVE OUT PRICE is….and drive out price is classified as the amount that you are financing after ALL THINGS ARE CONSIDERED!!!
This means Car Price – Taxes – DMV Fees – Trade Values – Trade Payoffs – Down Payments – EVERYTHING……
So after all the above is factored in, this gives you your true BOTTOM line…and the WORST thing to do is TELL a Dealer what you are being offered elsewhere….because of COURSE they are going to give you a lower number just to get you in the door. You have to treat each Dealership like they are the first one that you have contacted….and see what they are will ing to offer you without any of the “Can you do Better” stuff…..
The reason I am letting every know this is because about 10 minutes ago I recieved a Phone Call from someone looking at a New Honda Vehicle…..I quoted the Drive Out price (Which was WELL UNDER INVOICE….DRIVE OUT) That means the vehicle price was at or below cost….only to have them ask me “That’s is LOW as you can go?”……
At this point I am baffled, because I know the price I have given is WELL Below any competitor Dealer here…..and I find out after further discussion….she assumed the other offers she had gotten form 2 other dealers was Drive Out as well. They were offering a price which I knew was unreachable for them….made her THINK it was a drive out price…..then worked to make her come in….only to spring the “That was a plus taxes and fees Price” game on her.
Thankfully she called them back, got the entire breakdown of their pricing to find they were 1500.00 over my Drive out.
So my rant ends here……DO your homework and Dont be fooled by a low car price….because in the end all that matters is the Final Amount you pay!
Chris
May 31st, 2007 at 4:50 pm
“How do I get the best deal???” Well here are my 2 cents..
1st of all….see what numbers you can get by phone or email….the more info/numbers you get this way the more you can shop without leaving your chair….plus it gives you time to see honestly how “cool” that dealer will be to work with.
2nd….dont be in a rush, even if you are. Act as if you have all the time in the world and your shopping everything from kia’s to Benz’s.
3rd….dont discuss what numbers you want. I repeat….DONT DISCUSS WHAT NUMBERS YOU WANT. Once you give up your hand, its hard to keep a poker face.
4th…..work the deal as if you are paying cash before talking finance or trades.
5th….Car Math is just like 1st grade math:
a) For every 5k you finance, you are going to pay around 100 bucks a month for it over a 5 year term.
b) For every year under or over 5 years on financing…either add or take away about 35 bucks a month.
c) For every 1000 you either put down in cash or trade equity….or add to the loan because of negative equity…take away or add 20 bucks to your 5 year loan per month.
d) Your rate (or APR) Doesnt matter THAT MUCH on your payment like a lot of people think!! 1% in RATE = 11 to 6 dollars a month extra on a 24-60 month term respectively.
6th…..To get financed from tier 4 (worst) to tier 1 (best)…you HAVE to have a 580 to 720 beacon score. Anything lower and be happy you got a loan…but be prepared to pay some crazy rate.
7th…. if one dealer couldnt finance you…chances are NONE OF THEM CAN no matter what they might say……you hopping from place to place will only make your score worse. Pull your own credit and go shopping that way.
8th….and possibly the most important……..SHUT UP!!!!!
The more you talk, the easier you are to read. Negotiators do it for a living….regardless of how smart and savvy you think you are. They (we) (Me) are professionals at what they- we – I do…we feed our kids with this job…and we hear every kind of story thats possible to come up with…..and the more you talk or act like you have read every book on car sales…the more you are giving yourself away. By knowing everything you can before you walk in the door and making sure they (we) (me) doesnt know that….the better.
And lying that you got some 4.9 rate at so-and so credit union is the first way to tell a salesperson thats worth his salt that you have no clue about what you are doing.
We see rates all day. We see the best credit to the worst credit and we know what it takes to get whatever rate. Also, a dealership like mine uses over 30 lenders to get people bought. So that means I know what the best deal in town on rate-payment-term is by 730am every morning. The reason I want to know that is becasue this tells me what people need to get bought….and that helps me make money because that helps me get more people in a car that otherwise might not get done….or know that they could go for a new car when they thought they couldnt.
So the moral of the story is very simple….find the car(s) you want…compare them thru info sites, drive each one…and do your own math. Walk in the dealer, give them your math, tell them the rate tier you qualify for and tell them to clean and gas her so you can get your new car on the road…..just bring a pen to sign with and you are in and out within an hour or so and I (we) can go help someone else get into their new baby as well.
At least thats how I like to do it!
Of course not all dealers are that easy to deal with…so search till you find one that is!!
Chris
December 2nd, 2007 at 1:35 am
Hello, nice site