Buy-Here-Pay-Here dealers are under the legislative microscope in California and it has them rightly worried that their way of doing business may be severely crimped by legislation seeking to exert greater control over the industry.

Basically, in a nutshell, Buy-Here-Pay-Here dealers (or BHPH as you may see written elsewhere) are used car sellers who finance their customers. Typically, they sell less expensive used cars (i.e.

older models with high mileage). Customers, who usually sub-prime credit, end up paying high interest rates above 20 percent.

That's really where the BHPH dealers make their money. It's not so much as they are in the business of selling used cars as they are in the business of selling loans for used cars.

Somewhat immodestly, I offer up my primer on Buy-Here, Pay-Here dealers and what to expect. It will help you understand more about them and what to consider before and after buying a used car from them.

Various legislation has been introduced in the wake of a Los Angeles Times investigation. A great passage in the article sums up how most people feel about the industry: "In this little-known but fast-growing corner of the auto market, dealers command premium prices for road-worn vehicles and finance the sales at interest rates that can top 30%. In a kind of financial alchemy, they have found a way to turn clunkers into cash cows and make money off the least creditworthy customers: the millions of Americans who are stuck in low-paying jobs, saddled with debt and unable to qualify for conventional auto loans."

The article also reported that Buy Here Pay Here lots sold nearly 2.4 million cars nationwide [in 2010], up from 1.3 million a decade ago, according to CNW Marketing Research. CNW estimates that there are more than 33,000 such lots nationwide, compared with about 20,000 dealerships selling new cars. Buy Here Pay Here dealers make $80 billion in loans every year, according to the Federal Deposit Insurance Corp.

The strongest piece of legislation (i.e. the one that has the Independent Auto Dealers Association of California most worked up) is Senate Bill 956, introduced by California state Sen. Carol Liu of Southern California.

According to SubPrimeAutoNews.com (via AutoRemarketing.com) the bill would, among other things, require:

• Impose first-ever regulations on dealers offering buy-here, pay-here installment loans by requiring them to obtain a California Finance Lender's license.
• Limit used-vehicle installment loans to an interest rate of no more than 17.25%, which would give California the strongest cap in the nation.
• Change the way BHPH dealers are able to repossess vehicles to include grace periods and make it easier for buyers to reinstate a repossessed unit.

Dealers have begun a letter-writing campaign to Liu and other senators. They object to the bill, according to this sample letter on the Independent Auto Dealers website, with this language, " SB 956 will hurt my business and my customers because I cannot afford another $25,000 bond for the Finance Lender license. Also, the 17.25% interest rate is much less than they would be charged at another dealer who finances through a sub-prime lender. That is unfair competition. Also, if a repossession occurs the customer should have to pay for all costs to reinstate the contract. The dealer should not have to lend him any more money than was originally agreed upon."

In typical California fashion, there are some good aspects and bad aspects to this bill. It can be considered extremely anti-business. After all, how can the state set interest rates below that what credit card companies charge? Also, sudden spikes in interest (just 30 years ago mortgage rates were above 10%) could put BHPH dealers out of business and leave a lot of poor people stranded for transportation. Instead, the rate should reflect a standard bank metric plus, say, the 17.25% interest rate.

Also, repossession has to be part of the BHPH industry, unfortunately. Dealers have to be able to get their collateral (what the rest of us call our cars) back from borrowers who don't meet the terms of their loans. However, it should be easier for people to get a second chance and restore their loans. That's great consumer protection.

Keep an eye on this legislation. Buy Here Pay Here dealers are probably not going to pack up shop any time soon in California because of this legislation but, if you can squeeze a few more months out of your used car before having to replace it, you might want to wait for better interest rates.