What is Buy Here, Pay Here Financing?
Qualifying for a loan with a low credit score can be tough. You might not be able to get a competitive interest rate or you could end up paying more toward the down payment. But buying a car is a must for most people, especially those who have to drive to get to their jobs.
If you’re in this situation, you might feel tempted to consider a buy here, pay here financing offered by a car dealership. Learn more about this type of financing arrangement and whether it’s worth considering.
What Is Buy Here, Pay Here Financing?
The concept of buy here, pay here (BHPH) financing is right in the name: You finance the purchase of a vehicle from the same location where you’re buying it.
Dealerships often offer this auto financing option to buyers as a way to simplify the purchasing process. With in-house financing, you don’t have to go through another lender to get the vehicle you want. Some car dealers market these loans without a credit check, making them even more appealing to shoppers with bad credit.
Other terms for this type of financing include subprime car loans, no credit loans, in-house financing, and poor credit or bad credit auto loans.
Car Buying Options
When you’re at a car dealer, you might work with a salesperson as you look at and test-drive different models. After you make a decision about which car you want to buy, you have a few options.
Pay the Full Value in Cash
Most buyers can’t afford to pay the full value of a car in cash. A car is an expensive purchase, especially for younger buyers who might be going through the process for the first time.
However, if you do have enough cash to cover the car’s full value, you can buy it outright and not worry about financing.
Finance the Purchase
Most car buyers use financing and make payments toward their vehicles for a set period. Auto financing involves taking out a loan with a term that lasts between 24 and 84 months.
A longer term results in a lower monthly payment, but you do pay more in interest by extending the loan. A lender charges interest in exchange for loaning you the money, and the rate you can qualify for on a car loan depends on your credit history and other factors.
Financing the car is a viable option, but after you make that decision, you’ll have another one to make. Many lenders offer car loans, including banks and credit unions, online lenders, and the financing departments of car dealerships.
Lease the Car
If you’re looking at new model, you might qualify to lease it instead of financing or purchasing it outright.
A lease agreement allows an individual to rent a car from a dealership for a set period. At the end of the lease, that individual can return it to the dealership or possibly purchase it for a fixed price.
Only well-qualified people can lease cars, as many dealerships have strict credit history and financial requirements in place.
A car lease also requires the driver to keep the vehicle in good condition and only drive a certain number of miles each year. Any additional miles you drive in a leased car could incur mileage fees. Most car dealerships only lease brand-new models to customers.
How the Process of Buy Here, Pay Here Financing Works
If you decide to finance your vehicle purchase, the dealership might offer buy here, pay here financing. This type of loan differs from traditional dealership financing, which usually involves obtaining a loan through a third-party lender with which the dealer has a relationship.
When you choose a buy here, pay here loan, you make your car payments directly to the dealership rather than obtaining third-party financing.
You might be able to qualify for this type of auto loan without a credit check, making it appealing if your credit history is less than perfect. In some cases, buy here, pay here financing is the only option, such as for those who can’t qualify with traditional lenders.
The finance professional you work with will likely verify your income with a pay stub and also verify your residence. They’ll obtain your contact information so they can get in touch with you if any issues arise during the loan term.
Whether you finance through a traditional lender or use subprime financing, you’ll have to pay a portion of the purchase in cash. This is called a down payment, and it goes toward the value of the car.
A few lenders might require buyers to put a certain percentage of the price down, while others have more lenient down payment requirements. But for buyers with poor credit, a down payment is typically non-negotiable.
Pros of Buy Here, Pay Here Financing
Review some of the advantages of using a BHPH dealership when buying a car:
Qualify With Bad Credit
One of the main advantages of this type of financing is it can help buyers with bad credit qualify for car loans. A car is a necessity in most areas, and you might not have another option to purchase one, particularly if your credit score falls below traditional lender requirements.
One Location
Another benefit of this financing option is it provides a one-stop shopping opportunity. Instead of making a separate trip to a bank or credit union to obtain financing, you’ll complete the entire process in one location.
It’s important to note only certain cars usually qualify for buy here, pay here financing. A dealership might offer it on older or bare-bones models that aren’t as valuable as newer vehicles. According to a report published by the National Independent Automobile Dealers Association, the average price of a vehicle financed on a buy here, pay here loan was $7,004 in 2018. If you don’t mind driving an older car, a buy here, pay here auto loan might be appealing.
No Credit Inquiry
When you have a low credit score, a hard inquiry on your report can cause the number to drop even lower. Qualifying for a loan without a hard inquiry could be another advantage of choosing this type of financing agreement.
Cons of Buy Here, Pay Here Financing
Although buy here, pay here financing has its advantages, this financial arrangement also comes with some drawbacks:
Higher Interest Rates
One of this loan type’s major drawbacks is the interest rate. According to a Forbes article, buy here, pay here financing customers pay between 15% and 20% in interest.
By contrast, average interest rates through traditional lenders, such as banks and credit unions, are below 5%. Over the term of the auto loan, you could end up paying far more than the car is worth when you calculate all the interest included in each monthly payment.
Additional Fees
Some dealerships that offer buy here, pay here financing add other fees to deals, making the purchase even more expensive.
Higher Limits
Traditional lenders typically have loan limits in place to prevent buyers from borrowing more than a car is worth. This isn’t always the case with buy here, pay here financing, which means you could end up owing more than the car’s value, putting you upside down on the loan.
Should you decide to sell the car in the future, you might still have to make payments on a car you no longer own or absorb the financial hit.
Inconvenient Payments
A traditional car loan involves making a payment to the lender once a month. However, some subprime financing agreements require payments weekly or biweekly, which can be inconvenient, especially if you have to drive to the dealership to make the payment.
Possible Tracking Device
Another drawback is some dealerships install tracking devices on vehicles financed through subprime deals. The ability to locate the car at any time serves as a protective measure for the dealership should it go through the process of repossession.
If you don’t like the idea of someone knowing your vehicle’s location at all times, this could be a deal breaker.
May Not Improve Credit Scores
Because subprime loans don’t usually involve credit checks, making monthly payments might not improve your credit score. Dealerships might not report your payment history to the three main credit bureaus, which means your on-time payments might not show up on your credit history.
When you’re working to build or improve your credit, obtaining an auto loan through a traditional lender and making your payments on time each month can help the score go up.
Should You Use Buy Here, Pay Here Financing?
Ultimately, the decision about how to finance your vehicle purchase depends on your situation. If you have a low credit score, you might think a buy here, pay here loan is the only option available.
But other lenders might be willing to work with you, especially if you have money to put down or you’re considering a lower-priced model.
Alternatives to Buy Here, Pay Here Financing
Before you decide on a financing agreement, shop around and compare lenders. You can also take steps to improve your credit and save more money for your down payment.
Look for Lenders Specializing in Bad Credit Buyer
A dealership that offers auto loans certainly isn’t the only option to finance a car. In fact, some lenders focus on buyers with low credit scores and offer specialized programs to help them qualify. You might get a higher interest rate than someone with better credit, but it could be lower than the 15% or 20% rate you’d get with the dealership.
If you’re a credit union member or bank customer, that relationship can help you qualify for an auto loan as well. Check into options before entering into a buy here, pay here financing agreement.
Save More to Put Down
One way a lender can reduce their risk is to provide you with a lower-value loan. If you can save more money toward a down payment on your vehicle purchase, your loan amount will be lower, which means the lender takes on less risk. It’s easier to qualify for a lower amount, so try to save as much as possible before you make the purchase.
Consider a Co-Signer
When you can’t qualify on your own, another option is to obtain a loan with a co-signer, or someone who agrees to take financial responsibility for the loan along with you. A co-signer can — but doesn’t have to be — someone in your family.
However, finding someone who’s willing to co-sign on your loan might be difficult, as their credit is on the line. If you miss a payment, it could reflect negatively on their credit report.
Improve Your Credit
Depending on your situation, you might be able to take steps to improve your credit so you can qualify for a traditional auto loan. Review your credit report to look for anything that might be inaccurate.
If you find errors, report them to the three major credit bureaus so they can remove them. Make all your payments on time and in full in the months leading up to the car purchase so your credit report looks better to a lender.
Although buy here, pay here financing is an option to purchase a car, it might not be the right choice for your financial situation. As you consider all the lending options available, you can determine which is the ideal fit based on loan terms, interest rate, payment schedule, and other important factors.
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
