Big-money investors have found a hot new business to get behind: so-called “Buy Here Pay Here” used-car dealerships.

Such dealerships feed off desperate consumers who can’t get financing for cars, selling them older, high-mileage vehicles at inflated prices and offering loans with interest rates that are triple that of regular used-car loans. The term “Buy Here Pay Here” is derived from the fact that many of the dealers require borrowers to make their payments at the lot.

These dealerships are making an average profit of 38% on each sale, which is more than double the profit margin enjoyed by conventional retail car chains. That’s why investor groups are pouring money into buy-here-pay-here operations, even if they do have a buyer default rate of about 25%.

The Los Angeles Times. “It’s the gift that keeps giving.” “The amount of return from these loans you can’t get on Wall Street. You can’t get it anywhere,” Michael Diaz, national sales manager for Atlanta-based Small Dealers Assistance Inc. , which buys buy-here-pay-here loans, told. “It’s the gift that keeps giving.”

Now investment companies are buying these subprime car loans, bundling them into securities and, after getting credit rating firms to give them top-of-the-line AAA ratings, selling them to investors…to the tune of $15 billion worth over the past two years. If this scheme sounds familiar, it’s because that is exactly how the subprime housing market that led to the current financial crisis worked. Once again, short-term profit vultures are pushing loans to lower-income Americans, throwing them into a pool and, with the help of compliant ratings agencies, marketing them to banks, insurance companies and mutual funds.

Some Buy Here Pay Here dealers create their own securities. Writing in The Los Angeles Times, Ken Bensinger cites the case of Phoenix-based DriveTime Automotive Group, which bundled 52,000 car loans given to borrowers with an average credit rating of 518, which is considered “deep subprime.” They charged the borrowers an average of 21% interest and sold the bundles in two offerings for $461 million.

-David Wallechinsky, Noel Brinkerhoff

Investors Place Big Bets on Buy Here Pay Here Used-Car Dealers (by Ken Bensinger, Los Angeles Times)