Buy Here Pay Here

Written By : Josh Jones on December 5, 2019

Buy-here, pay-here financing: What you need to know

At a glance:

Buy-here, pay-here financing usually come in handy for borrowers who have bad credit in order to help them secure auto financing. However, you are also likely to encounter a few challenges while looking for this type of auto financing. The loans come with extremely high charges that can even be more than the vehicle’s worth.   You are also not guaranteed that the loans will improve your credit score.

When you have poor credit, getting approved for an auto loan can be a nightmare.  Luckily, there are some car dealers that provide “buy-here, pay-here” financing to consumers with bad credit scores.

 With this type of auto financing, the buy-here-pay-here dealer acts as the lender as well as the seller by offering the auto financing and the vehicle from a single location. These loans are sometimes advertised by dealers as “No Credit Check” loans.  This is usually to make the loans appealing to car shoppers who have poor FICO scores.   

As much as Buy-here, pay-here loans may seem to be like a lifesaver, the high costs associated with them might not be worth it. Keep reading to find out how they work. 

 How buy-here, pay-here financing works

When buying and financing a vehicle from a traditional dealer, the dealer will have to share your details with a third party lender for a loan approval. Once your car loan has been approved, you will then be required to pay your monthly installments directly to the lender, and not the dealership. 

But Buy-here, pay-here dealerships tend to operate in a different way. The dealerships sell and at the same time offers financing to the vehicles; hence you are likely to see these dealerships advertise as “no credit, no problem” or “we finance.”

In case you are planning to purchase a vehicle using a buy-here, pay-here dealership, among the requirements is to provide proof of residence and income. But in most cases, the dealer does not perform a credit check.  After the dealer comes up with the auto loan amount which you can be approved for, you will be able to see and compare the different types of vehicles within this price range.

In 2017, the average selling price of a vehicle from a buy-here, pay-here dealership lot stood at $7,201 while the down payment average was $801. This was according to data from an industry report that was released by the National Independent Automobile Dealers Association. 

Car Shopping Strategy - Buy Here Pay Here Charlotte NC

Disadvantages of buy-here, pay-here financing

These types of loans are viewed as one of the easy ways for consumers who have poor credit to get qualified for auto financing. However, these loans also come with their share of drawbacks.

They tend to be costly

In regards to the interest rate that you will have to pay for the auto loan, buy-here, pay-here dealerships tend to be quite costly compared to other alternatives to auto financing. Most of these loans have an average interest of about 20%; which is quite high as compared to what you would find in say credit unions and banks. Also, there are high chances that the buy-here, pay-here dealers will charge other additional fees. According to data obtained from the National Credit Union Administration, the average rate of interest on a used car which had been in operation for four years was 5.31% from a bank. Credit unions on the other hand charged 3.44% on the same vehicle in the third quarter of 2018.

These high costs are likely to lead you into a financial crisis. According to a report by the National Independent Automobile Dealers Association, one out of every three consumers who took out a buy –here-pay-here loan in 2007 were added in the list of defaulters.

 In addition to the high rates of interest and additional fee charges, you might also find yourself paying more than the vehicles worth.  When you apply for an auto loan through a traditional lender, the value of your vehicle is one of the main determinants for the loan amount.  On the other hand, Buy-here, pay-here dealerships do not have restrictions on the maximum loan amount that a car shopper can borrow. You may therefore end up paying more than the car’s worth.

auto loan

They are not helpful in terms of building credit

When you make your payments on time, you are likely to improve your credit score, and future lenders will consider you as a less risky consumer to work with.  But not all buy—here-pay-here dealerships report a borrower’s financial behavior to the three major credit reporting agencies. So even if you may all your payments on time, you may not see a difference in your credit reports or score.

A tracking device can be installed in your vehicle

Having a low credit score means that you are a risky borrower. So, the dealer will want to ensure that they are able to repossess the vehicle in case you stop paying your installments.  An estimated two-thirds of these dealers install tracking devices on the vehicle or devices that can stop it from starting, enabling the dealer to repossess the car in cases where you fail to repay the loan.

Unfriendly payment structures

With this type of loan, you may be required to make in person payments on either weekly or bi-weekly basis. This could end up being inconvenient as compared to mailing a check or making your payment online.

Alternatives to buy-here, pay-here financing

There are other alternatives that might also work for you other than working with a buy-here, pay-here dealership. The following are a few options you might also consider:

Consider Shopping around

If you feel that buy-here, pay-here financing is the best auto financing option for you, it is advisable that you compare the different options available. First, ensure that you check your FICO scores and then also compare quotes, both from the internet and at credit unions and local banks. You might find used car dealers that specifically provide auto loans to consumers with less-than-stellar credit.

It is equally important to check the annual percentage rate on the loans, how long the loan will take monthly installments, and other additional fee charges for different loan options. Also, try to find out from the lender reports consumers’ credit information to the credit reporting bureaus since this can go a long way in rebuilding your credit.

Paying cash for a used vehicle

 This is an old option where you can save enough money to purchase a used car.  You can then follow the steps that will help improve your credit score after a period of time and qualify for an affordable auto loan to purchase a new car.  You can even trade in the pre-owned car and apply for a lower loan amount.

Acquiring a Car Loan IN Buy Here Pay Here Dealerships

A co-signer may also come in handy

If you have a poor credit history, then you should also consider adding a co-signer to the car loan. This may increase your chances of getting approved for the loan.

The co-signer can either be a trusted relative or friend of yours who has a healthy credit history and also understands the risks involved. In this case, if you fail to make a payment, then the co-signer will be on the hook to pick up the slack. It is important to note that any missed or late payments will appear on both the borrowers’ credit reports. This can, in turn, hurt both of your credit.

Conclusion

Just because you might be having low credit scores, it doesn’t mean that buy-here, pay-here auto loans are your only best solutions. There is a high chance that you could end up paying a lot more than your car is worth, not to mention the high interest that is associated with them.

Therefore, it is advisable that before you consider going to a buy-here, pay-here lot, you should consider checking your credit and applying for pre-approval from some lenders. This way, you will be able to compare loan terms and interest rates across several lenders. Having different options will ensure that you get the best deal on a car loan.