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Having a fair or bad credit score can put you off many credit opportunities, including buying a car. However, some auto dealerships work with borrowers who may not qualify for a traditional auto loan by offering Buy Here Pay Here (BHPH) financing.
BHPH dealers may sound enticing to borrowers with low credit scores or minimal credit histories, but there are risks that may not make them the best choice. Here’s what to consider before choosing BHPH financing for your next car purchase.
How does buy here pay here?
When you buy a car from a traditional dealership, they submit your application to an auto lender. If you’re denied a loan, chances are you can’t afford to buy your car – especially if you’ve relied on financing to get your car. At BHPH, the dealership manages your loan and your car, making it both a dealer and a finance company.
Instead of finding the vehicle you want to buy and then securing financing like you would at a traditional dealership, BHPH dealers do it the other way around by:
- Finance first. The dealer will first see how much they are willing to loan you, which could be based on your credit history and down payment.
- Then select a vehicle. With the financing numbers, they show you the cars that fit into that range. You can choose from the retailer’s inventory, but you may not always have many options.
With BHPH you have a better chance of getting a car loan for your chosen vehicle as many of these dealers either do not have a credit check or guarantee approval for borrowers with bad credit.
Note: You may not see “Buy Here, Pay Here” on documentation or marketing materials. Instead, you may see phrases like “financing available” or “we finance” to lure buyers who don’t have good credit and need a car right away. Check with the retailer exactly what type of financing they offer.
Buy here Pay here
Auto loans often have some of the lowest interest rates of any loan product. The average interest rate for new cars for borrowers with excellent credit ratings was 2.47% and for used cars was 3.61% in the fourth quarter of 2021.
For BHPH borrowers, you can usually expect much higher interest rates on auto loans – typically between 15% and 20%.
Does “buy here, pay here” affect your credit score?
Most auto loan lenders will perform a hard credit check on your credit report. So your score will be temporarily impacted when you fill out a car loan application. But after a few timely payments, your score should go back up.
However, with BHPH there is a chance you won’t be hit by a tough credit check. Some lenders don’t check at all, and others check but don’t hold bad credit scores against borrowers looking for financing.
Not all BHPH lenders report your loan to the major credit bureaus. This means that making payments on time will not increase your score as a loan may not be recognized on the report. On the other hand, if you default on payments and your car is repossessed, your credit score may not go down like it would with a traditional auto lender.
Related: What credit rating is required to buy a car?
Buy Here Pay Here Alternatives
A study by the Consumer Financial Protection Bureau (CFPB) found that you are more likely to default or default on your auto loan when you visit a BHPH dealership compared to traditional dealerships. It’s not because the borrowers were more or less risky, but because the interest rates were so high.
If you have bad or fair credit and are in financial distress, BHPH could be tempting. You will most likely be approved and board a car the same day with little to no approval process. But you might want to consider other options first.
Look for credit
Instead of basing your decisions solely on what you can get from the dealer, secure financing first. You can compare rates and options at different banks, credit unions, and online lenders. Check out what you need to qualify such as: B. Minimum credit and deposit requirements.
If you secure financing before going to the dealer, you already have a way to pay for your car and don’t have to rely on the dealer’s financing options to get one.
Find a co-signer
If you have a parent, partner, or other trusted friend, see if they will co-sign your loan with you. This is a big commitment as they are as responsible for your loan as you are – but a co-signer can be a big help for many borrowers.
Just make sure both you and your co-signer understand the risks and all of your options in terms of repayment.
Negotiate with the dealer
If you are securing financing through a traditional dealer, remember that numbers are not final until you sign a legal contract. Check everything carefully, including the total amount you’re financing for the car, the interest rate, and your monthly car payment.
If possible, try to negotiate a lower interest rate. However, if the price cannot go lower, see if there are other vehicles available at a lower price that better match what you can afford. You could also ask for a longer-term loan, which could lower your monthly payments—just remember that you’ll likely have to pay more interest over the life of the loan.
Related: Best time to buy a car
Consider a personal loan
A car loan is not always the only financing option when it comes to buying a new car. You can also use a personal loan to buy a car. Although personal loans don’t require a down payment or collateral—in this case, your car—they usually have stricter requirements than auto loans. They also tend to have higher interest rates. So before you decide, compare a few personal loan options to see if you may qualify for a lower interest rate or terms that work better for you.
Review all of your options
While “buy here, pay here” financing may seem like a great option if you have bad credit, it may not offer the best prices and terms. Review all of your options before making a decision. Even with bad credit, you can find ways to finance a car that’s right for your situation — and your finances.
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