You may have seen advertisements by car dealerships offering “bad credit” or “no credit” financing. What exactly does this mean and is it too good to be true? Read on to find out!
What Is Buy Here, Pay Here Financing?
Buy Here, Pay Here (BHPH) refers to in-house financing from the car dealership itself. Because they cater to credit-challenged buyers, BHPH dealers are willing to take lower credit scores and higher risks than most traditional lenders if the customer has the income and the down payment to back the loan they are wanting.
How Does Buy Here, Pay Here Financing Work?
With a traditional car dealership, your financing is typically outsourced to a third-party auto lender. In contrast, BHPH dealerships handle the financing for you.
First, the BHPH dealership will determine what loan amount you qualify for. Then it will show you its available cars in that price range.
Once the purchase is finalized, you make monthly, bi-weekly, or weekly payments directly to the dealership you bought the car from.
Pros of Buy Here, Pay Here Financing
Here are the benefits of using buy here, pay here financing:
1. Easier to get approved
BHPH dealerships have looser lending standards. Often, you don’t need to have a good credit score or any credit history at all. For some credit-challenged buyers, this may be the only way to buy a car.
According to Tiger Okeley at BHPH car dealership Oak Motors, “Buy here, pay here financing is a great option for people that have experienced financial challenges and need a second chance.”
2. Simple car-buying process
Because it integrates financing into the sale, the BHPH car-buying process is much simpler. There’s no separate loan approval process, which means less paperwork and less time. If you want a seamless car-buying experience, BHPH could be the way to go.
3. Low or no down payment
Some BHPH dealerships also offer low or no down payment loans, making it even easier to buy a car. If you don’t have a lot of cash saved up, BHPH could be the ideal financing solution. Most BHPH dealerships are willing to work with you, no matter your financial situation.
Cons Of Buy Here, Pay Here Financing
That said, there are some downsides of BHPH financing:
1. Higher interest rates
Offering car financing to those with poor or no credit can mean a higher risk of default. To offset the increased risk, BHPH dealerships tend to charge higher interest rates on their car loans. The interest rate will probably be close to the maximum allowed interest rate in your state. In some cases, that could mean an interest rate as high as 20%, which is much higher than the average car loan interest rate.
2. Risk of repossession
Traditional auto lenders and BHPH dealerships can repossess your car if you stop making your payments. However, BHPH may provide less leeway if you’re struggling to keep up with payments and may even install tracking devices and shut-off switches in your car to make repossession easier.
The Bottom Line
Financing a car through a BHPH dealership can be a great option if you haven’t had time to build up your credit or it’s not very good. But you should always review the loan agreement’s fine print so that you understand all its terms regarding repossession, late payments, grace periods, etc.
As long as you know what you’re getting into, a BHPH plan could be the right option.