Most people don’t have enough cash on hand when buying a car, so they take out an auto loan. If your lender is a financial institution like a bank, they’ll probably pull your credit report, which might worry borrowers with poor credit.
With buy here, pay here (BHPH), potential car buyers with bad credit, or no credit, can actually secure in-house financing from the dealership — you may have even seen signs offering “no credit check, no problem” or “no credit loans.” But this type of car financing will come at a very high cost, perhaps more than the car is worth. You’ll pay higher interest rates and may even have to consent to being tracked with buy here, pay here.
How buy here, pay here works
Buy here, pay here financing is a car loan — almost always for pre-owned vehicles — provided directly by the auto dealership. This is not the same thing as the dealership extending you a loan from a partnered financial institution, like a local credit union. (In that case, the dealership acts as a middleman between you and the credit union, saving you the trip there but likely charging you a fee for arranging the loan.)
Buy here, pay here loans are the car dealership’s very own version of in-house financing. If you take out a buy here, pay here loan, the dealership will become your lienholder. It will set your rates and your payment schedule — weekly or biweekly payments are common.
(Read more about dealer financing vs taking out a loan from a lender.)
The terms of a loan (any loan, not just a car loan) are largely dependent on your credit score. The better your credit score, the better your interest rate. It usually means you can put down a smaller down payment, too. But buy here, pay here loans typically don’t come with a credit check. This makes them especially enticing if you have bad credit. But it also means that the lender, in this case the auto dealer, will set the interest rates very high.
The down payments for car with a BHPH loan vary. They could be large or very small to entice customers. While standard lenders are regulated by the Federal Reserve as to how much they can let you borrow, the used car lots and dealerships are not. They might finance your car for more than it’s worth, especially if it’s a pre-owned car. Buy here, pay here car lots stand to benefit from repossession. They’ll take back your car if you make late payments and put it back on the lot to sell to the next low-credit buyer.
Pros and cons to buy here, pay here
Securing financing through a buy here, pay here loan is much faster than the typical loan process, since the dealership will virtually decide on the spot. Obviously the biggest benefit of buy here, pay here loans is that you’ll be able to get the financing for your car that might not have gotten elsewhere due to a low credit score. But this comes with a huge disadvantage, especially in terms of cost.
Very high APR
BHPH car loans have higher interest rates — over 15% — closer to those of credit cards. For comparison, the average auto loan taken out with a traditional lender has an APR closer to 5%.
More than a third of borrowers default on their buy here, pay here loan, according to an industry report by the National Independent Automobile Dealers Association.
Credit history
Most auto dealers won’t report your payments to credit bureaus, so how you make your car payments won’t have an impact on your history. This could be either a benefit or a disadvantage, depending on how punctual you are about it. You won’t be able to build your credit score, even if you’re diligent about making payments.
Bi-weekly payments
Buy here, pay here loans have a different repayment structure than traditional loans. Instead of monthly payments, you may have to make more frequent payments: biweekly or even weekly.
Location tracking
It is not uncommon for the car dealer to install a GPS tracking device on your newly financed car. This makes it easier for the lender to repossess your car if you miss any payments.
Alternatives
If you have bad credit, you can still find other financing options when you buy a car.
Get a co-signer
Have someone with a higher credit score sign off on your loan with you. A traditional lender might approve knowing that your co-signer can help shoulder the debt if you can’t make payments.
Try an online loan
These days you’re not limited to financial institutions like banks or credit unions if you want to get a loan. Online lenders tend to have more lenient credit requirements. Read more about online loans here.
Improve your credit score
If you don’t need a car immediately, you can delay your purchase while you try to rebuild your credit score. Maybe your credit score is low due to late payments, or utilizing too much of your credit-ratio. Take steps to pay off your debt and do so in a timely manner.
