FYI: When purchasing a new vehicle, it’s important to consider both the car and the financing options available, as different dealerships offer varying levels of service and financial flexibility.
Decoding Buy Here, Pay Here Car Dealerships
When it comes to buying a car, the choices can be overwhelming. From selecting the right vehicle to choosing a lender and settling on a payment method, the process is multifaceted. While big franchised car dealerships and traditional used car lots are common go-tos, another option exists that might not be on your radar: the ‘buy here, pay here’ dealerships. These often-overlooked options come with their own sets of advantages and pitfalls. Let’s dive into what makes these dealerships unique and what to look out for.
Understanding How Buy Here, Pay Here Dealerships Operate
Traditional car dealerships generally help you secure financing by submitting your credit application to various banks. However, buy here, pay here (BHPH) car dealerships, also known as BHPH dealers, take a different path. They provide in-house financing, making them a viable option for individuals who might not qualify for traditional loans. These dealerships often advertise specifically to customers with poor credit by showcasing easy loan approvals right on their lots.
Here’s the typical process:
- Credit Checks: Often skipped in favor of income verification.
- Income-Based Loans: Dealers use income information to determine lending limits.
- Older Inventory: Cars tend to be older models, with an average price of approximately $7,000 in 2018.
- Payment Plans: Down payments are mandatory, and payments go directly to the dealership, often on a weekly or flexible basis.
The Benefits and Drawbacks of Buy Here, Pay Here Dealerships
Pros:
- Accessibility: Ideal for those with poor or limited credit histories who need a car.
- Fast Approvals: Dealerships offer quicker approval processes, sometimes skipping rigorous credit checks.
- Flexible Payments: Options for weekly or biweekly payments make budgeting more manageable for some buyers.
Cons:
- Older Vehicles: Expect cars that are older, less reliable, and potentially costly to repair.
- High Interest Rates: Interest rates can soar to about 20% – significantly higher than traditional loans.
- Additional Fees: Hidden fees and high late payment charges can make repayments challenging.
- Tracking Devices: Some dealerships install trackers to ease the collection process, raising privacy concerns.
Financing Terms at Buy Here, Pay Here Dealerships
The in-house financing model of BHPH dealerships comes with its own set of financial caveats. With interest rates averaging around 20%, the cost of borrowing is considerably higher. High-interest rates escalate monthly payments and can add unexpected costs. The prevalence of loan defaults—around one-third of BHPH buyers—makes this a high-risk business approach. Be prepared for added costs, such as late fees, which further complicate repaying the loan.
Credit Score Implications
One aspect often overlooked is how BHPH dealerships impact your credit score. Unlike traditional auto loans, these dealerships might not report your payment history to credit bureaus, which means paying off the loan on time doesn’t necessarily boost your credit score. Additionally, the limited payment options—sometimes only offering in-person or mailed payments—can make the process less convenient compared to banks that offer online payment options.
Alternatives to Buy Here, Pay Here Lots
Given the high risks and potential downsides of BHPH dealerships, it’s wise to explore alternative options:
- Paying Cash: If possible, buy a used car with cash to avoid loan hassles.
- Private Sales: Purchasing a vehicle from a private seller can avoid dealer fees, though be prepared for government taxes and fees.
- Shop Around: Look for lenders specialized in helping those with poor credit. Although interest rates might still be higher than usual, they won’t match the exorbitant rates of BHPH dealerships.
- Co-Signers: Having a co-signer with good credit can help secure better financing terms.
If you find yourself with no other options and must resort to a BHPH dealership, approach the process meticulously. Request a pre-purchase inspection and test drive the vehicle thoroughly to ensure it meets your needs.
Conclusion
Navigating the realms of buy here, pay here car dealerships doesn’t have to be daunting. While these lots provide an essential service for those with poor credit, it’s crucial to be aware of the high-interest rates, hidden fees, and older vehicle options. Always do thorough research, consider all your financing options, and, if you must use a BHPH dealership, proceed with caution.
Lawrence Jacobs, Editor of Automotive.fyi
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