Understanding Buy Here Pay Here Car Dealerships

There are several decisions to consider when you’re in the market for a car. Aside from selecting a vehicle, you must also decide on a lender or a payment method if you opt not to take out a loan. While major franchised car dealerships and used car lots are common choices, there is another option known as a buy here pay here car dealership. These dealerships may not always receive the best reputation, but they offer unique benefits worth exploring further.

How does a buy here pay here car dealership work?

Most car dealerships provide financing for their vehicles, but buy here pay here (BHPH) dealerships take a different approach. Instead of sending a credit application to a bank for approval, BHPH lots finance the vehicles themselves and can extend credit to individuals who might not be approved through traditional channels. These dealers typically request proof of income and other documentation without running a credit check.

The dealer uses income information to determine the loan amount for a car purchase. Research shows that vehicles from BHPH dealerships tend to be older and of lower value compared to traditional used car dealers, with prices averaging just over $7,000 in 2018. A down payment is usually required, and loan payments are made directly to the dealer, often with flexible payment plans.

Pros and cons of a buy here pay here car dealership

BHPH dealerships can be a viable option for buyers with poor credit or lower incomes who need a reliable commuter vehicle. However, the age and mileage of the cars on these lots can result in costly and frequent repairs, offsetting any initial cost savings. Some dealers stock older luxury vehicles to attract customers, only for buyers to realize that maintenance costs are as high as those for new models.

What is buy here pay here financing?

Since BHPH dealers act as their own financial institution and offer in-house financing, their interest rates are typically much higher than traditional lenders. The average interest rate for a BHPH loan in 2018 was 20%, which is significantly more than conventional four-year loans and credit union loans. Additional fees and costs associated with these loans can significantly increase the total purchase price of a vehicle.

More than a third of BHPH customers default on their loans, making this business model risky for lenders. Some dealers use tracking devices for easier repossession, leading to potential concerns about privacy invasion. Customers may also face high late fees and other charges, making it challenging to pay off the loan.

How do buy here pay here dealerships affect my credit score?

In some cases, on-time payments made to a BHPH dealer may not be reported to credit bureaus, regardless of whether the loan is paid off in full. This lack of reporting can prevent credit score improvement even with consistent payments. Additionally, the payment schedule can be burdensome, especially with dealers who require weekly or bi-weekly payments.

Alternatives to buy here pay here car dealerships

If you’re hesitant about BHPH dealerships, there are alternative options available with less risk and stigma. Paying cash for a used car can be a cost-effective way to avoid loans and associated fees. Buying from a private seller may also help you avoid dealer fees, although you’ll still need to cover taxes and other expenses.

Shopping around for lenders who specialize in bad credit auto loans is another option to avoid BHPH lots. While you might face slightly higher interest rates, they are typically lower than those at BHPH dealerships. Having a co-signer can also help you qualify for a loan, but it’s important to understand the potential risks involved.

If a BHPH dealership is your only option, approach the purchase as you would any car transaction. Request a pre-purchase inspection, take the time to carefully test-drive the vehicle, and conduct thorough research beforehand. By entering the buying process armed with knowledge, you can ensure a better overall experience.