There are a lot of choices to make when you’re car shopping. Beyond choosing a vehicle, you’ll need to select a lender or decide how you want to pay if you don’t want a loan. You might think that all car dealers are created equal, but there are options beyond major franchised car dealerships and used car lots. One type of used car store is known as by the term buy here pay. These buy here pay here car dealerships are an option that many shy away from – in many cases for good reason – but there’s more to them than meets the eye. Let’s take a closer look.
How does a buy here pay here car dealership work?
Most car dealers offer financing on the vehicles they sell, but buy here pay here car dealers — sometimes shortened to bhph dealership — take a slightly different approach. Rather than accepting a credit application and submitting it to a bank for approval, buy here pay here car dealership lots finance the vehicles in-house and can offer credit to borrowers that wouldn’t be approved through traditional channels. These are the roadside dealers you see with signs that advertise bad-credit car loans and other offers. You’ll likely be required to provide proof of income and other documentation, but in most cases, the dealer won’t run your credit.
The dealer uses your income information to determine how much it is willing to lend you for a car purchase. Studies have shown that buy here pay here car dealership vehicles are older and of lower value than traditional used car dealers’ inventories, with prices averaging just over $7,000 in 2018. You will be asked for a down payment, and the loan payments are made to the dealer. In some cases, these stores offer weekly payments or flexible payment plans.
Pros and cons of a buy here pay here car dealership
Buy here pay here car dealership lots can be a decent option for buyers with jobs but bad credit and people with lower incomes who just need a commuter vehicle. That said, the age and mileage of many cars on these lots can make them unreliable and expensive to repair, killing any cost benefit from the lower purchase price. Some stores stock older luxury vehicles to entice buyers, only for them to realize that fixing the car is no less expensive than a new model.
What is buy here pay here financing?
Because buy here pay here car dealership stores act as their own bank and offer in-house financing, they tend to have far higher interest rates than traditional lenders, with average rates reaching 20 percent in the 2018 study. That’s nearly four times the rate of conventional four-year loans and more than six times as much as the average credit union loan. In addition to high interest that leads to high monthly payments, they also tend to charge higher fees and add other costs that can drive the price of a vehicle purchase far higher than its listed sales price.
More than a third of buy here pay here car buyers default on their loans, making the business especially risky for lenders. Some install tracking devices that ensure an easier repossession process, which some might view as an invasion of privacy. There may also be exorbitant late fees and other charges that make it more challenging to pay off the loan.
How do buy here pay here dealerships affect my credit score?
Some buyers might find that the dealer isn’t reporting their on-time payments to a credit bureau, even if you’ve paid the car off in full, which won’t help your credit if you’re faithfully on time. That means the payments may not have an impact on a buyers' credit score, good or bad. Additionally, some buyers find that the payment schedule can be annoying, especially with dealers who require weekly or bi-weekly payments. There are fewer payment options, too, as small dealers don’t typically offer the automatic withdrawals or online payment systems that larger banks do.
Alternatives to buy here pay here car dealerships
If any of this has made you skeptical of these types buy here pay here car dealerships, the good news is that there are several other options with less risk and stigma. If you’re able, paying cash for a used car is an excellent way to avoid the hassle and expense of a loan. Buying from a private seller is a great way to avoid paying dealer fees, though you might still need to pay taxes and other costs to the government. This method is one of the best for saving money, but the downsides are that you won’t get any credit history from buying in cash, and you have to have a lump sum to make the purchase.
Shopping around is another solid way to get around buy here pay here car dealership lots. Even if you have a spotty credit history, lenders are available to make auto loans that don’t require vehicle trackers or sell old cars. You might have to pay a slightly elevated interest rate if approved, but you won’t have to deal with the sky-high rates of a buy here pay here car dealership. A co-signer could also help you qualify for a loan, but it’s essential to make sure they understand the risks and potential costs associated with their involvement.
If you truly cannot wait for a car purchase and do not have any other avenues to pursue, proceeding with a buy here pay here car dealership lot can be a relatively straightforward way to get behind the wheel. However, it’s important to treat the process like any car purchase, making sure to ask for a pre-purchase inspection and taking the time to test-drive the vehicle carefully. Go into the purchase with your eyes open, armed with research, and you will have a much better experience.
