Buy Here Pay, Here Financing: What You Need to Know

Buying a new or used car is usually necessary for most people, especially those who have to drive to get to their places of work. However, getting approved for an auto loan can be challenging, particularly if you have a low credit score. You might be charged higher interest rates on the loan, or you could pay more toward the down payment.

Fortunately, there are dealerships that work with borrowers who cannot qualify for a regular auto loan by offering buy here, pay here (BHPH) financing. They offer in-house financing, particularly to people with less-than-ideal credit.

While buy here, pay here financing may sound appealing to many borrowers, there are risks that could make it a less viable financing option. Here is what you need to know about buy here, pay here financing to help you decide whether it’s the right financing option.

What is a buy here, pay here financing?

Buy here, pay here financing is a form of automobile dealership where the dealers offer a car loan. You pay for your car directly to the dealership monthly rather than the bank or credit union.

The main distinction between a buy here, pay here financing and a normal auto loan is that with buy here, pay here, nearly everything goes directly through the local auto dealer. That means the contract agreed upon for the car loan is between the dealer and the buyer only. Dealers sometimes advertise this financing as “no credit check” loans, making them even more appealing to borrowers with bad credit.

How does a buy here, pay here financing work?

When you buy or finance a car at a traditional dealership, you typically send your application off to an online auto loan lender. You can also apply for a loan at the dealership and have your information sent to lenders in the dealer’s network to find the best fit. If approved for credit, you make monthly payments to the lender that financed the loan.

Buy here, pay here works the other way around. Instead of finding the car you want to buy and securing financing, the dealership will finance it first. They will first determine how much they will lend you, which could be based on your creditworthiness and down payment.

The dealership will then choose a car for you. With the financing figures, they will show you the vehicles that fit within that range. You have to choose a car from the dealership’s inventory, but you may not always have a lot of options.

Because most dealerships have no credit checks or guarantee approval to shoppers with poor credit, you have a greater chance of getting approved for a car loan for the vehicle you choose. They might also add incentives like no money down or zero interest for the first six months.

However, to compensate for the additional risk, buy here pay here dealerships have security measures in place. This may include a firm plan to repossess the car if you fail to make payments. They might also charge much higher interest rates than traditional lenders.

Pros of buy here pay here financing

Buy here, pay here financing makes a lot of sense if you have poor or no credit. You may also consider this kind of auto financing if you don’t want a hard inquiry on your credit report or only want to borrow a small loan for a short time. Here are a few advantages of buy here, pay here financing.

No credit required

The greatest advantage of buy here, pay here financing is that the dealership doesn’t check your credit history or score. You will not be denied a loan for lack of credit history or a low credit score.

As long as you have proof of income, proof of residence, and a valid ID, you can acquire financing for the vehicle of your dream. Buy here, pay here dealerships often sell used lower-end cars, but you can find a variety of makes and models, newer and luxurious cars.

It’s easy to get a car

With conventional dealerships, finishing the loan application process can take a while, especially if you have bad credit. However, getting financing from a dealer means purchasing a car can be pretty easy and quick.

BHPH dealerships offer a one-stop auto center where buyers can find a suitable car that fits their lifestyle. Dealerships will also work with customers to negotiate the price tag based on equitable market values and online pricing.

Little or no down payment

Most buy here, pay here loans require little or no down payment. You can secure this auto financing with as little as $500. Buy here, pay here financing may be ideal if you want to buy your dream car but don’t have the resources to save money for it. However, the amount you get depends on your income, the vehicle you choose and the loan term.

It can help rebuild your credit

Buy here, pay here financing can be a great way to rebuild your credit if you find a reliable and trustworthy dealer. While not all dealerships report your credit history, a legitimate one will report your payment to a credit reporting agency. Reporting your payments improves your credit rating, and a higher rating can lead to lower interest rates, which could save you money in the long run.

Cons of buy here pay here financing

While buy here, pay here financing has unique benefits, this financial arrangement has some downsides. Here are a few cons of buying a car through buy here, pay here financing.

Higher interest rates

One of the major drawbacks of this kind of auto financing is high-interest rates. According to Forbes, customers pay between 15% and 20% in interest when they finance a car through a buy here, pay here loan. That means you may pay far more than the vehicle is worth over the life of the loan. On the other hand, the average interest rates can be as low as 5% when you finance a car through a traditional lender such as a bank or credit union.

Tracking devices and repossession

Most dealers install tracking devices such as a simple GPS into cars financed through subprime auto loans. This is to help them locate the vehicle at any time, and it serves as a protective measure should the dealer decide to repossess the vehicle because of a default. However, this can be a big deal breaker, especially if you dislike the idea of someone always knowing your car’s location.

Increased loan limits

Conventional loan lenders usually have loan limits that prevent buyers from borrowing more than they can afford. However, this is not always the case with buy here pay, here loans, meaning you might end up owing more than your car is worth. This could put you upside down on the loan, also known as negative equity. You might still have to pay for a car you no longer own should you decide to sell the vehicle in the future.

Inconvenient payments

A regular auto loan involves making payments to the loan provider once a month. Nevertheless, most buy here, pay here dealers require you to make weekly or bi-weekly payments. While this might be a convenient option if your work pays weekly, remembering to pay weekly can be quite challenging.

Dealerships also have limited options for how you can make payments. That means you must ensure you meet their expected payment method, which may include bank transfer, check, or through Venmo.

Conclusion

Buy here, pay here financing can be a great option to buy a car, especially when you have less-than-stellar credit. However, this financing option comes with a few risks and might not be the right choice for your financial situation. Therefore, before you purchase a car through buy here, pay here financing, ensure you know your car’s value. Most importantly, make sure you understand payments and ensure you can make the loan payments on time.