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If your credit isn't in great shape, you might be considering a "buy here, pay here" (BHPH) dealership that focuses on borrowers with poor or bad credit. At these dealerships, loans are offered in-house rather than through outside banks or credit unions, but they don't typically offer the best deal around.
While this route is worth considering if your credit needs improvement and you're having trouble landing an auto loan to buy a car, there are some potential pitfalls to consider.
How Does "Buy Here, Pay Here" Work?
When you sign a contract to buy a car with a loan through a traditional car dealership, that dealer arranges financing for you with a separate lender. Or, you might secure an auto loan directly with your bank or credit union before you head in to the dealership.
When you have bad credit, you might not be able to qualify for financing with these options. And if you can't pay with cash either, buy here, pay here dealerships may be on your radar. Rather than sending customers to third-party lenders, BHPH dealers both sell and finance the cars on their lots.
As a result, BHPH dealerships have more discretion and flexibility on borrowing standards since you'll pay them directly. You likely won't have a credit check; instead, you'll just need proof you can afford monthly payments (for example, proof of employment and residency).
However, the major trade-off with BHPH is that the loans they offer typically come with higher interest rates than other loan options. Payments might also be required weekly or biweekly rather than monthly.
How Does "Your Job Is Your Credit" Work?
A type of financing similar to BHPH is called "Your job is your credit." Both are in-house car loans offered by dealerships for shoppers with low or no credit.
While you have to show proof you can afford a BHPH loan, there may be flexibility on what type of financial resources you demonstrate. Paystubs, bank statements, tax returns or award letters could suffice, depending on the dealer.
With your job is your credit financing, your eligibility and loan terms are based on your job and income. You'll need to provide extensive proof of income, and your terms will be based on that.
The downsides of your job is your credit are similar to those of BHPH. However, interest rates might be slightly lower going this route over BHPH. Another plus-side: With your job is your credit, your income can come from multiple jobs as long as it meets the minimum amount required.
Pros and Cons of Buy Here, Pay Here Car Lots
Before shopping for your next vehicle at a buy here, pay here car lot, get familiar with these possible pros and cons.
Pros
- Credit-challenged borrowers can get approved: If your credit is in bad shape or you haven't yet built a credit history, you may think financing a car through a dealership is out of the question. With a BHPH dealership, approval standards are lower than traditional lenders, making a car purchase more accessible.
- Efficient car-buying process: 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.
Cons
- Costs are steeper: Because BHPH dealers typically work exclusively with bad- or no-credit buyers, they tend to charge higher rates than traditional auto lenders. Depending on the dealer, the highest interest rates can top 20%. Some dealerships also add a slew of fees, driving up your total costs. If you have a large down payment and a high interest rate, your loan payments might not be able to keep up with your vehicle's depreciation, leaving you underwater with negative equity.
- 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. Not all cars on the lot may be eligible, and you might only have older or less appealing cars to choose from. This leaves you with fewer options than you'd have at a traditional dealer.
- Potentially large down payment: Bad-credit borrowers pose more financial risk to dealerships. To help mitigate that, some BHPH dealers require a larger down payment than a traditional dealership might expect. However, some BHPH dealers offer low or no down payments, so shop around.
- Repossession risk is higher: Both BHPH dealerships and traditional auto lenders can repossess your car if you stop making payments. But with a BHPH dealership, you have fewer options and may get less leeway before repossession if you're struggling to keep up on payments. It's important to familiarize yourself with your state laws so you know your rights.
Does Buy Here, Pay Here Hurt Your Credit?
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. Some lots advertise that buying a car this way helps you rebuild credit, but it's common for these small outfits to not actually report on-time payments to credit bureaus. Many only report negative information, such as late payments, so your credit score won't receive the benefits of on-time payments like with a typical auto loan, according to the Consumer Financial Protection Bureau.
That said, applying for a loan with a BHPH dealer likely won't impact your credit score. 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, which saves you from their temporary sting.
If improving your credit is important to you, consider seeking a BHPH dealer that says they will report on-time payments, and ask for it in writing.
Should You Avoid Buy Here, Pay Here Lots?
Buying a car from a BHPH lot might appeal to you if you have bad credit and have run out of options for purchasing a car. It's best to only go this route only as a last resort, however, since the costs and risk of repossession are typically higher and your credit might not benefit from on-time payments. Before proceeding, look for other options first (see suggestions are below).
If you keep striking out, then a BHPH can be a good option since they specialize in shoppers with bad credit. Just know what to expect and familiarize yourself with your rights.
How to Get an Auto Loan With Low Credit
If you want to avoid BHPH lots and purchase a car using a traditional lender, here are ways to land an auto loan despite less-than-stellar credit.
- Get a cosigner. If you have a trusted family member or friend with good credit, they can help you qualify by cosigning on your auto loan. Just know they're sharing financial responsibility with you, so missed payments can hurt both of your credit scores.
- Try a credit union. While a traditional car dealership can arrange financing for you through a lender, you can save money by obtaining a loan directly with your bank or credit union of choice. Credit unions typically offer lower fees and loan rates and may be more open to lending to people with bad credit.
- Look for specialty lenders. Seek out third-party lenders that work with bad credit, many of which are online-only. You'll pay a higher interest rate than shoppers with good credit, but once you secure a loan directly with a lender, you can purchase a vehicle at any dealership.
Improve Your Credit Score to Increase Your Options
Another way to improve your chances of landing a traditional auto loan and save money is to first improve or build your credit. Spend a few months focused on actions like paying all bills on time, reducing debts and limiting new credit applications.
You can also try Experian Boost®ø, a feature that could help you improve credit by counting on-time bill payments that normally don't show up on your credit report.