Buy Here Pay Here Financing: How It Works, Pros, Cons & Alternatives

Buy here, pay here financing is a type of in-house financing offered by some car dealers, especially those selling low-value cars. This type of financing is usually offered without a credit check, making it appealing for buyers with no credit or poor credit. Buy here, pay here financing can be a viable financing option, but there are also some serious drawbacks.

Here’s what you need to know to decide if buy here, pay here financing is the right choice for you.

How Buy Here Pay Here Financing Works

Traditional car dealers offer financing packages from other lenders. Buy here, pay here car dealerships offering in-house financing, often without a credit check. They may add incentives like no interest for the first six months or no money down. 

To compensate for the additional risk, buy here, pay here dealers have extra security measures in place, including a strong plan to repossess the vehicle in case of a missed payment. They also charge much higher interest rates than conventional lenders.

Buy here, pay here dealerships will calculate the maximum amount you can borrow based on proof of income and current offers. On the basis of that assessment, they will show you cars that fit within that budget.

☝️ Buy here, pay here financing makes sense if you have no credit or want to avoid a hard inquiry on your credit report, but you often pay for the greater flexibility in higher interest rates, higher total costs, and/or tracking and control. 

Pros of Buy Here Pay Here Financing

Buy here pay here financing makes the most sense for someone who has poor credit or no credit. You might also consider this type of auto financing if you don’t’ want a hard inquiry on your credit report, or you only need to borrow a small amount for a short time. Here are the main advantages of buy here, pay here financing:

👍 Less Hassle

Applying for credit at the dealership is simple and hassle-free. The process of purchase and securing financing is all part of one package. There is minimal paperwork required, and all future payments will be made directly to the dealership.

👍 Immediate Decision

When you apply for auto financing, you do not always receive an immediate decision. If you have a lower credit score, no credit history, or lack adequate proof of income, this is especially true. With buy here, pay here dealerships, you will know immediately if you are approved for a loan and the amount of the loan approval. 

👍 Little or No Money Down

Many buy here, pay here loans require little to no money down. You can secure this type of loan with as little as $100. If you dream about affording a car but don’t have the resources to save up the funds for it, this is a solution. Some dealers will even offer specials with no money down. 

Be alert that dealerships have to make up for their risk somewhere. If a dealership requires no money down, they will often charge higher interest rates to mitigate the cost. 

👍 No or Low Credit Accepted

The biggest advantage of buy here, pay here financing is that they don’t look at your credit history or credit score. You won’t be denied a loan for no credit history or a low credit score.

With proof of address and proof of income, you can secure financing for the car of your dreams. While buy here, pay here dealerships usually sell used lower-end cars, you can find a variety of makes and models, including newer cars. 

Cons of Buy Here Pay Here Financing

Buy here, pay here financing makes sense in certain circumstances, but it is not always the best financial choice. You pay for the convenience with higher interest rates, higher total car cost, tracking devices, and more.

👎 Interest Rates

The average interest rate for a buy here, pay here financing option is around 20%. Compare that to the average interest rate for a bank auto loan – 4.42% to 6.61% – and it’s clear that you could pay thousands of dollars more for the same car. 

👎 Total Car Costs

Buy here, pay here dealers sometimes charge higher total car costs. If you’re not careful, you might end up borrowing more than the vehicle’s value. For example, if a car’s market value is $6000, a buy here pay here dealer might charge $7000, knowing that you won’t be able to get financing at another dealer. 

👎 Negative Equity

If you take out a loan with no money down, you will almost certainly owe more than your car is worth. This is negative equity, often called being upside down or underwater on your loan.

If you have negative equity, the dealer will require expensive “gap insurance” to cover the difference between the car’s value and the amount of the loan if the car is lost or destroyed. It will be difficult and expensive to sell the car or trade it in.

👎 Tracking Devices and Repossession

Many buy here, pay here dealerships will install tracking or other controls into vehicles. This includes everything from a simple GPS tracking device to a remotely controlled device that prevents the vehicle from starting. 

You also run the risk of faster repossession with this type of loan. Conventional dealers may give you a chance to catch up on your payments or even restructure your loan. That’s less likely with a buy here pay here dealer. To avoid repossession, you’ll want to be sure not to be late on a payment. 

👎 No Credit Boost

One of the biggest advantages of taking an auto loan is the boost it gives to your credit score. Since credit diversity is one of the key influences on your overall credit score, adding an auto loan to the mix – and making payments on time – can help you improve your credit score over time.

👎 Inconvenient Payments

Many buy here pay here dealerships require weekly or bi-weekly payments. While this can be a convenient option if you are paid weekly, it can also be an extra hassle to remember to pay weekly. Dealerships will also sometimes have limited options of how you can pay, so you’ll want to make sure that you can meet their expected payment method (check, phone, bank transfer, Venmo, etc.). 

Alternatives to Buy Here Pay Here Financing

Even without a credit history, you can get better interest rates and terms with other financing options. Here are the best alternatives to finance a vehicle purchase:

• Look for conventional financing. Car loans are secured loans, so many lenders are willing to lend to borrowers with weak credit. More and more lenders are willing to consider factors like income and bank records in lending decisions. Credit unions are often more willing to approve applicants with low credit scores. They also often offer the lowest interest rates.
• Find a co-signer. If you have no credit history or a low credit score, you can get someone with a higher credit score to be a co-signer. Approval will be easier, but if you fail to pay your co-signer will be liable for the balance of the loan. You and the co-signer should be fully aware of the risks and responsibilities.
• Increase the down payment. Even with a low credit score, a large down payment can get a loan approved. To increase your success, aim to have at least a 20% down payment ready.
• Pay cash. The lowest interest rate is no interest rate. If you can save up enough to pay for the car in cash, you avoid the hassle of auto loans entirely. You have freedom to shop at any new or used car dealership to get the best price on the car of your choice. 

If you don’t need the car immediately, consider taking some time to build your credit if you don’t have a credit score or rebuild your credit if it’s damaged. You’ll get a much better deal on car financing and on almost any other financial product.

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