How Buy Here, Pay Here Dealer Financing Works

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Having trouble securing an auto loan to buy a car? "Buy here, pay here" dealerships offer in-house financing, typically to borrowers with bad credit. While this route is worth considering if your credit isn't in great shape, there are some pitfalls to consider.

What Is a Buy Here, Pay Here Dealership?

When you sign a contract to buy a car with a traditional car dealership, it passes the contract on to an auto lender, which provides a loan for the purchase. With a buy here, pay here (BHPH) dealership, however, the dealer sells and finances the cars on its lot.

BHPH dealerships specialize in working with people who have bad credit or no credit history at all. As a result, they can provide an opportunity that some borrowers will have a hard time finding anywhere else.

Before you consider a BHPH dealer, though, it's important to consider both the benefits and drawbacks of doing so.

  • Credit-challenged borrowers can get approved: If your credit is in bad shape or you haven't had the chance to build a credit history, you may think financing a car through a dealership is out of the question. With a BHPH dealership, however, approval standards are lower than what you'll find with traditional lenders.
  • The process is simple: When you buy a car from a BHPH dealer, you're done with the entire buying and financing process when you drive off the lot. With traditional dealerships, it can still take a while to complete the loan process, especially if you have bad credit.
  • Costs are high: Because BHPH dealers work exclusively with people with bad or no credit, they tend to charge higher rates than traditional auto lenders that have a mix of borrowers with good and bad credit. Depending on the dealer, you can expect to pay an interest rate as high as the maximum rate allowed by law in your state. Some dealerships also add a slew of hidden fees to the contract, driving up your total costs.
  • Selection is limited: Instead of picking a car and then talking about financing, BHPH dealerships first determine your eligibility, then show you which cars you qualify for. This means you might have fewer options than you would with a traditional dealer.
  • Expect to make a large down payment: Working with bad-credit borrowers carries a certain amount of risk. To help mitigate that risk, BHPH dealers typically require a larger down payment than a traditional dealership might expect. If you don't have much cash on hand, it will limit your choice of cars.
  • There's a high chance of repossession: Both BHPH dealerships and traditional auto lenders can repossess your car if you stop making payments. But with a BHPH dealership, you may get less leeway if you're struggling to keep up on payments.

How Do Buy Here, Pay Here Dealerships Affect My Credit Score?

Most legitimate auto lenders report your payment activity to all three credit reporting agencies (Experian, TransUnion, and Equifax), which can help improve your credit score if you're making regular on-time payments. But that's not always the case with BHPH dealerships, especially if it's a small outfit for which the costs of reporting would be too high.

That said, applying for a loan with a BHPH dealer likely won't impact your credit score negatively either. Many such dealers don't run a credit check when you apply for a loan, so you won't see a hard inquiry on your credit report. These inquiries typically knock less than five points off your credit score.

Also, if the dealership does end up repossessing your car, that likely won't show up on your credit report either, which can prevent future problems.

Check Your Credit Score Before Going to a Buy Here, Pay Here Car Lot

Before you consider going through a BHPH dealership, make sure you know what other options are available.

First, check your credit scores to see where you stand. Depending on where your score is on the spectrum, you may still qualify to work with a traditional car dealership that works with bad-credit borrowers.

Second, get a copy of your credit reports to see if there's anything you can work on before you apply. If one of your reports shows erroneous information, for instance, you can file a dispute with the credit reporting agency to get it removed.

Alternatives to Buy Here, Pay Here Financing

After you've checked on your credit, there are a few different options you can choose without resorting to working with a BHPH dealership.

Wait and Improve Your Credit Scores

If you don't need a new car right away, take some time to work on building your credit before you start shopping around. Some tips include:

  • Directly address the issues hurting your credit score.
  • Get a credit card or use an existing credit card and make payments on time every month. Also, consider paying your balance in full every month to avoid interest, or at least keep your balance relatively low to maintain a good credit utilization rate, or the amount of credit you're using divided by the total amount of credit you have available.
  • Ask a family member with great credit to add you as an authorized user on their credit card account.
  • Avoid applying for new credit too frequently.

Once you've improved your credit, you may have a better chance of financing a car through a traditional dealership.

Get a Co-Signer

Most traditional auto lenders allow you to apply for an auto loan with a co-signer to improve your chances of getting approved. A co-signer acts as a backup in case you can't make your payments, reducing the lender's risk.

Keep in mind, though, that your co-signer will be equally responsible for paying off the loan, and the loan will show up on both of your credit reports. So make every effort to stay on top of the loan and avoid breaking your loved one's trust.

Consider Borrowing From a Local Credit Union

Credit unions typically offer lower fees and loan rates and may be more open to lending to people with bad credit. If you're already a member of a credit union, ask about your eligibility.

Second-Chance Auto Loans

Second-chance auto loans are loans specifically designed to help people with bad credit get the financing they need. Instead of focusing on your credit, second-chance auto lenders typically look at your income and expenses, residency, employment stability, and other factors to determine your eligibility.

Online Auto Lenders

Because online lenders have lower overhead costs than traditional lenders, they can pass some of those savings on to their customers and accept borrowers with higher risk profiles.

What's more, you can often get prequalified and see what you're eligible for without submitting an official application.

The Bottom Line

Getting approved for an auto loan with bad credit or no credit history at all isn't easy, but it is doable. Buy here, pay here dealerships offer financing to people with less-than-stellar credit, but the drawbacks tend to outweigh the benefits.

Instead, check your credit score and report, and take a step back to consider other options that can help you achieve your goal and cost you less in the long run.