The cost of buying and maintaining a car seems to only go up over time. If you are in the market for a new or used car, one of your biggest concerns should be how to pay for it.
There are many ways to pay for a vehicle. Some people pay for the car in full with cash. Others prefer a loan from a dealership, bank, or credit union. If you are considering a loan and have less-than-stellar credit, however, your options may be more limited.
So, should you shop at buy-here, pay-here car dealerships? Here’s a look at what you can expect from “buy-here, pay-here” car loans and the sellers that stand behind them.
If you see car lots advertising cars for people with bad credit and no credit, they're likely buy-here, pay-here car lots. While they may be attractive at first glance, these types of loans should be approached with extreme care.
Buy-here, pay-here car dealerships offer a car buying opportunity to people who don’t qualify for traditional loan terms. Borrowing from a buy-here, pay-here dealer usually doesn’t require a credit check. Instead, they use income verification to support the sale.
However, like other financing options for people with poor credit histories, car loans from buy-here, pay-here lots often come with unfavorable terms and high interest rates.
If you see the term "tote the note," it is likely this type of dealership. The reason they are able to offer financing without credit is that they act as their own bank. Instead of getting paid cash when selling the car, BHPH dealers carry the loan themselves. Your payments are made to the car dealership and the dealer repossesses the car if you don't pay as agreed.
So while you may be able to walk out with a car from one of these dealerships even when you can’t at others, it may be better to avoid buying with this type of loan.
Here’s a quick rundown on a few of the pros of these types of car dealerships:
The big benefit of buy-here, pay-here is the ability to get a car with no credit or bad credit.
Getting financing from the seller means buying a car can be relatively quick and easy.
This type of lot often sells cars in worse condition than traditional dealerships and may be more willing to take an older car that isn’t in great shape.
These cars often come with interest rates around 20%. That’s similar to what you would pay on a credit card and around four to five times more than a traditional car loan.
Because of the default and repossession rates, about two-thirds of these dealerships require a vehicle tracking device.
Many of these loans require monthly or sometimes weekly payments. And those payments often have to be made in person.
Many buy-here, pay-here loans are not reported on your credit report and don't help your credit score.
Instead of choosing the car you want and figuring out the financing, this type of dealer may look at your financing first and then give you a limited set of vehicles to choose from.
Higher down payments lead to lower payments during the borrowing period. However, high down payments may be required and may not be easy for low-credit borrowers.
Traditional auto loans require a credit check. That means you will need a positive credit history and a certain minimum credit score to qualify. But doing so unlocks much lower interest rates.
As of this writing, the average interest rate for a car loan is around 4% to 5%. BHPH dealers charge much more.
You may also find a higher quality selection of vehicles at a more traditional car dealership. Down payments and monthly costs are a driving factor of car budgets for most people. But when you get auto financing from a third party instead of the car lot, you can choose any car in your budget from any seller.
The 2018 Used Car Industry Report from the National Independent Automobile Dealers Association says the average cost of a car from this type of lot was $7,201 with an average $801 down payment. That’s just over 11% down on average.
According to the CFPB, you may end up paying thousands of dollars more than the value of the vehicle in financing charges. Overall, if you are able to do so, avoiding buy-here, pay-here dealerships and car loans is the better choice.
Most traditional loans and credit cards are reported to at least one of the major credit bureaus. When this is the case, on-time payments will help you build credit over time. But like payday lenders, most buy-here, pay-here car sellers __don’t report your loan to the credit bureaus. __
This means you will be paying high interest rates and have to make regular monthly payments with no long-term benefits to your finances. Do not get a car loan from a BHPH dealership with the goal of improving your credit with the loan.
If you are looking for a new car and want to skip buy-here, pay-here car lots, consider these alternatives instead:
One way around credit checks is skipping credit altogether. Paying cash for a reasonable used car may be your best bet.
Many dealers work with local banks and credit unions, or other lenders, and refer customers to those loans during the purchase process. This requires better credit than buy-here, pay-here auto financing. Just be careful about going “upside-down” during the process.
A handful of online lenders are willing to lend to qualified buyers when buying a new or used car. Again, this requires better credit than buy-here, pay-here financing.
Credit unions are like banks in many ways, but they are not-for-profit. Some credit unions may be willing to lend to borrowers with lower credit scores and often have better rates than a bank.
If you want to build your credit before shopping for a used car loan, consider a secured credit card or Credit Builder Account from Self. When your Credit Builder Account matures, you walk away with a savings account balance perfect for a down payment on a pre-owned car with traditional financing, or whatever else you’d like to use it for.
A co-signer is someone who is willing to let you use their credit to qualify for a better loan. However, they are also responsible for payments and the loan will also show up on their credit report.
A seemingly small difference in interest rates could lead to a much bigger cost over the life of a loan, so it’s worth the effort and attention to improve your credit. Right now, it’s a car. In the future, it could be a home. In that case, good credit could easily save you tens of thousands of dollars, or more.
For now, if you have bad credit, do your best to find a reputable dealer that will treat you fairly. If you do decide to buy a car through a buy-here, pay-here dealership, use care when picking both the car and the loan. If you don’t, you could make a very expensive mistake.
CFPB. "What is a “no credit check" or “buy here, pay here” auto loan?". https://www.consumerfinance.gov/ask-cfpb/what-is-a-no-credit-check-or-buy-here-pay-here-auto-loan-en-887/
Experian. "How Buy Here, Pay Here Dealer Financing Works". https://www.experian.com/blogs/ask-experian/what-is-a-buy-here-pay-here-dealership/
Credit Karma. "Buy-here, pay-here financing: What you need to know". https://www.creditkarma.com/auto/i/buy-here-pay-here
Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications. See Eric on Linkedin and Twitter.
Lauren Bringle is an Accredited Financial Counselor® with Self Financial– a financial technology company with a mission to help people build credit and savings. See Lauren on Linkedin and Twitter.