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. Not all dealers go this far, which is why you may want to steer clear of Buy Here Pay Here financing.
Who is Eligible for Buy Here Pay Here Financing?
If you have bad credit or little or no credit history but can provide proof of income and residency, you could be eligible for a buy-here-pay-here auto loan. Remember, the lender simply wants reassurance that you’ll make timely loan payments, and they charge steep interest rates to account for the level of risk borrowers pose. So, other factors aren’t as important for loan approval.
Tips for Choosing a Buy Here Pay Here Dealership
Research and Read Reviews
Do your homework to identify reputable options. Look at online reviews from past and current customers, and ask friends and family who might have experiences with local buy here, pay here dealers for recommendations.
Read the Terms and Conditions
Read the entire contract to familiarize yourself with the terms and conditions of the financing agreement. If you have any questions or concerns, inquire with the lender before signing the loan documents to seal the deal.
Understand Vehicle Warranties and Return Policies
Ask the dealer if they offer warranties on the vehicles they sell. Also, ask about the return policy so you’ll know if you can bring the vehicle back if issues arise shortly after driving after the lot.
Comparing BHPH to Traditional Car Dealerships
Financing Options
Traditional car dealerships typically work with third-party lenders, or banks and credit unions, to finance their customers, whereas BHPH dealerships handle financing in-house.
Vehicle Pricing
Expect higher pricing at BHPH dealerships, as the cost of financing is often built into the purchase price.
Customer Relationship Management
Traditional car dealerships tend to focus on building long-term relationships with customers, while BHPH dealerships focus on the immediate sale and financing of the vehicle.
Common Misconceptions about Buy Here Pay Here
Myth: It’s Only for Bad Credit
Many people think BHPH is only for those with bad credit. While BHPH dealerships often help those with poor credit, they’re also available to buyers with no credit history or those who want an alternative to traditional financing.
BHPH dealers can approve loans without a credit check. This flexibility can benefit you if you want to avoid conventional credit checks, even if your credit isn’t bad.
Myth: Lower Quality Vehicles
Another common belief is that BHPH lots only sell poor-quality cars. This is not always true.
While some dealers might offer older models, many BHPH dealerships provide reliable and well-maintained vehicles.
Look for reputable BHPH dealers known for their quality inventory. Visiting the dealership and inspecting the cars yourself can help you find a dependable vehicle at a reasonable price.
Myth: Predatory Lending
Some think BHPH dealers engage in predatory lending with extremely high interest rates. Although interest rates can be higher than those on traditional loans, they usually stay within state regulations.
Many BHPH dealers offer rates around 20% APR, not the exaggerated 30% or more that some might fear.
Knowing your state’s interest rate caps can give you peace of mind. Always ask for the loan terms upfront and read them carefully to ensure they’re fair.
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 sooner rather 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.
Secured Auto Loans
Secured auto loans require you to use the car or another asset as collateral. They are a reliable way to finance your car if you have the collateral to back it, but you could lose your asset if you default on the loan agreement.
Credit Union Financing
Credit unions are member-owned and often provide lower interest rates on auto loans. You might also find more flexible terms and fewer fees. However, this option is only available to credit union members. So, you want to ensure you meet the membership requirements before applying.
Personal Loans
You could potentially qualify for a personal loan from an online lender specializing in helping credit-challenged borrowers. A key advantage is that you can use the funds however you see fit, giving you added flexibility. But be prepared for potentially higher monthly payments compared to traditional auto loans.
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.
