Do you need to buy a car but can’t get approved for financing through a traditional bank, credit union or online lender? Some dealerships offer “buy here, pay here” financing to help you secure an auto loan, even if you have less-than-perfect credit. However, it can be costly, and there are better alternatives worth considering before settling for a loan from a buy here pay here dealership.
What is Buy Here Pay Here Financing?
In short, buy here pay here financing is used to describe auto loans financed in-house by the dealership. So, instead of working with an outside lender to handle the financing and receiving a lump sum for the vehicle, the dealership acts as the lender and receives monthly payments from the borrower over time.
How Does Buy Here Pay Here Financing Work?
If you purchase a car the traditional way, you’ll either arrange financing on your own or apply at the dealership and have your information shopped to lenders in its network to find the best fit. Buy here pay here financing doesn’t quite work this way, though.
In most instances, the dealer will only confirm your income and residence when you apply. Based on this information, you’ll be given a loan amount you’re eligible for and the down payment you’ll need to seal the deal. However, you likely won’t undergo a credit check when you apply.
You’ll remit payment to the dealership each month for the loan term. But if you want to pay the loan off early, you could be subject to an early repayment penalty.
Pros of Buy Here, Pay Here Financing
Option for Credit Challenged Borrowers
You don’t need good or excellent credit to qualify for buy here pay here financing. In fact, you could get approved even if your credit score is in the trenches if you can demonstrate to the dealership that you’re able to make timely loan payments.
No or Little Money Down
Expect to make a down payment on the vehicle. However, the amount you’ll need will depend on your income, the amount you’re approved for, the car you select and the loan term.
Simple Process
Buy here pay here dealerships streamline the car-buying process from start to finish. You’ll arrange financing, pick out your ride and make payments through the same dealership.
Cons of Buy Here, Pay Here Financing
Very High-Interest Rates
These loans are risky to the lender since they cater to borrowers with credit challenges. Consequently, the cost of borrowing is elevated to hedge against the risk of default on the loan payments.
Limited Selection
You’ll be limited to the vehicles on the dealer’s lot that are within a certain price range. Unfortunately, most cars are used and dated with lower resale values.
Bigger Risk of Repossession
The steep interest rates that come with buy here pay here financing often cause the monthly loan payments to be unaffordable. In turn, the risk of default is much higher, and the car could be repossessed.
May Not Build Your Credit
Some buy here pay here dealerships do not report account activity to the credit bureaus. This is a significant drawback since payment history is the largest component of your credit score. On-time payments reflected on your credit report could help improve your credit health.
Vehicle Tracking Devices May Be Installed
If you don’t make your auto loan payments on time, your vehicle could be disabled or tracked down and repossessed, thanks to a tracking device installed by the dealership. While not all dealers go this far, which is why you may want to steer clear of buy here pay here financing.
Alternatives To Buy Here Pay Here Financing
Pay In Full with Cash
If you’re not in a rush to buy a car, set a savings goal and make the purchase in cash once you meet it. Of course, saving up thousands of dollars could take time. Still, you won’t have to worry about making monthly principal and interest payments to a lender since you’ll own the car outright.
Save for a Down Payment
Does saving up to pay in full seem like a stretch? Scale back your goal and consider saving up for a down payment instead. Even if your credit score is low, a traditional lender, credit union or online lender may approve you for an auto loan.
Pay Using Your Credit Card
Credit card interest rates are quite high. Still, you’ll likely pay less over time if you use your credit card to buy a car than you would with buy here, pay here financing. So only use this option as a last resort if you desperately need a car, and aim to pay the balance off sooner than later.
Ask Someone to Co-sign
A co-signer with solid credit and a steady source of income could help you get approved for an auto loan with favorable terms. However, be mindful that your co-signer will be equally responsible for loan payments, and a default could hurt both credit profiles.
Explore and Compare Auto Loans and Refinancing Options
If you choose to save money, one great way to lower your existing monthly car payment to help you save more or make your current payments more manageable is through refinancing. Or, if you get a loan but get a bad deal, you may be able to refinance to a lower rate if your credit or the value of your vehicle goes up.
Make smart moves, and you can avoid having to get a loan with a buy here pay here dealership.
