Buy Here, Pay Here Financing: What Is it and How it Works

When it comes to essential purchases in life, a car is undoubtedly near the top of most people’s lists in America. However, it's not always easy to get pre-approved for a car loan, especially if your credit is less than adequate.

This is where the Buy Here, Pay Here system can help and allow people with bad credit to get a vehicle through a direct loan from the dealership.

Buy Here, Pay Here (commonly abbreviated to BHPH) dealerships provide in-house financing - usually to borrowers with bad or no credit. You may want to take this approach if you don't have good credit. But before you do, there are a number of things to consider.

When you sign a contract to purchase a car with a standard car dealership, it will pass the contract onto an auto lender. This lender will provide the loan for the purchase. With a dealership that offers a Buy Here, Pay Here financing agreement, the dealer will sell and finance the cars in-house. 

Buy Here Pay Here dealers specialize in people who have either no credit history or bad credit, allowing them to purchase a car when they would be flat-out refused elsewhere. 

How Does Buy Here, Pay Here Financing Work?

If you intend on purchasing a car through a Buy Here, Pay Here dealership, you might be asked to verify your income and provide proof of residence. You will likely need a down payment, too. Once you have these in place, the process is pretty smooth.

One of the benefits of BHPH is that the dealer doesn't usually check your credit. With that said, the cars on Buy Here, Pay Here dealers are generally older and cheaper.

The Pros and Cons

While the Buy Here, Pay Here is often touted as an easy way for people with credit problems to get financing for the car they want, it’s not that simple, nor does it come without some downsides. Let’s look at both the good and the bad, shall we?

Pros

• A Simple Process. When you purchase a vehicle from BHPH dealerships, it's all done under one roof. You choose your car, pay for it, and undergo the financing process before you drive away from the lot. Compared to traditional dealerships, where the loan process can take a while to complete, this makes life a lot simpler. 
• Much Higher Approval Chances. Whether you haven't built a credit history yet or circumstances have resulted in a bad credit rating, a BHPH business has lower approval standards than traditional lenders. That means you can get approved even when you’d get rejected at most other places.

Cons

There are also several downsides that you need to consider.

• Can Be More Expensive. BHPH dealers work with people who have bad or no credit, so they are less likely to cut you slack regarding interest rates. The average interest rate on this type of loan is approximately 20%, while the average interest rate for a used vehicle in 2021 is between 4.09% and 8.66%, according to Experian. We don’t need to tell you what this means - higher interests = more money owed.
• Larger Down Payment. When you have bad credit, working with borrowers means a certain amount of risk for both sides. It is for this reason that Buy Here, Pay Here dealers usually require a larger down payment compared to traditional dealerships. 
• Limited Selection of Cars to Choose From. The process of qualifying involves the dealership determining your eligibility and then showing you the cars you qualify for. Depending on your credit score, this could mean you have fewer options than a traditional dealer.
• Higher Chance of Repossession. Just as traditional auto dealers can repossess your vehicle if you do not make your payments, the same applies to BHPH dealerships. However, if you go via Buy Here, Pay Here car lots, they may be more lenient to those struggling to keep up the repayments. 
• Stricter Terms. It's important to note that Buy Here, Pay Here loans may put certain stipulations in place to ensure that you can keep up your repayment schedule. For example, you may need to make weekly or biweekly payments, which can be inconvenient compared to a monthly payment plan. Some dealers may also install devices that track the vehicle or stop the engine from starting if you default on the payments, which is a serious breach of privacy and, frankly, a scary measure to think about.

Do Buy Here, Pay Here Loans Go on Your Credit File?

Having a good credit score is vital for many people wishing to make large purchases. While a lot of them will choose a BHPH dealership as a way to show they are reliable borrowers by paying on time, BHPH businesses don't always report payments to the three credit reporting bureaus (Experian, TransUnion, and Equifax).

This is especially true if the dealership is a small outfit where the cost of reporting would be too high.

While applying for these loans, some dealers do not run a credit check at all. If they do check your credit, it's typically through “soft pulls” that don’t affect the credit score, and if the vehicle gets repossessed due to your inability to repay, it's unlikely to show up on the credit report.

This means you will seldom see what is called a “hard inquiry” on your credit report. It also means that you likely won’t build good credit through this type of vehicle purchasing system.

Alternatives to BHPH

When people hit a bad credit rating or have no credit to build upon, they may think that a Buy Here, Pay Here loan is the only option available. The truth is that there are many alternatives to this type of car loan, so here are a few to consider.

Save More Money for a Down Payment

If you can save enough money and can hold off on purchasing a car, saving enough money for a down payment can help you qualify for a car loan with a lower interest rate.

Pay Cash for a Used Car

One of the best ways to bypass the financing and credit check unpleasantries is to purchase a pre-owned vehicle with cash. Buying a used car from a private seller may mean more risks but also a chance for paying less for a good quality vehicle in comparison to a dealership. 

Get a Co-Signer

If you need to purchase a vehicle from a dealership, asking a friend or relative with healthy credit to be a co-signer to the loan could help you get approved. However, any missed or late payments will appear on both borrowers’ credit files which can have a detrimental impact on your friend’s credit rating as well as yours.

Look Around for Financing Options

If you have only considered Buy Here. Pay Here financing, know that there are other options available to consider. For example, credit unions may work with people with less than perfect credit.  However, in order to qualify, you would need to be a member of a credit union. Certain lenders offer auto loans for people with bad credit  - these may well be the best chance you have of getting a fair deal on your next car loan.

Is Buy Here, Pay Here Worth It? 

That depends. Even if you have a low credit score, it may not be the best option because you could end up paying much more than the car is worth. Check your credit score first, check out all available options, think whether convenience is worth more to you than saving some money, and then make your choice.