Buy Here Pay Here car dealerships

In the used car market in the United States and Canada, buy here, pay here, often abbreviated as BHPH, refers to a method of running an automobile dealership in which dealers themselves extend credit to purchasers of automobiles.[1] Typically, purchasers of cars at BHPH dealerships have poor credit history, and loans have high interest rates.[1] BHPH can provide options for those unable to meet credit standards elsewhere.

History and background[edit]

The BHPH Industry originated primarily in the early 1970s during the United States savings and loan crisis. With many similarities to the financial crisis of 2007-2010 credit was difficult to obtain, unemployment was rising & the economy was still in a transformation from a production-based economy to a service-based economy.

Automobile dealers who still wanted to sell cars had to find a way to deal with the increasing price of vehicles relative to income. They had to sell these vehicles to wary consumers who were unwilling or unable to pay cash for the new purchase at the point of purchase. In many cases, when banks would not lend to the consumer, the automobile dealer would start a related finance company (RFC) and have the finance company approve the loan on the vehicle. This represented a step into the consumer finance business for automobile dealers. The advantage to the dealership of having an RFC finance was decreased risk on the sale and finance of the vehicles sold. Since both the RFC and the dealership had the same ownership, the owners could benefit from the profit on the sale of the vehicle and the profit on the loan for the vehicle. Historically, the down payment required on a BHPH loan was generally larger than the total profit on the sale of the vehicle. Therefore, if the buyer didn’t make payments, the RFC could repossess the vehicle and sell it again at the dealership. Since 2008, many outside lending institutions have entered the market and the average down payment on a BHPH loan has significantly decreased, as dealers try to maintain a share of the market.[2] Many of the benefits of separating the RFC out from the BHPH dealership are based in the tax code changes of the Tax Reform Act of 1986. The Act restricted any companies that utilize inventory in their operating business from using cash accounting.

Issues[edit]

Due to the high upfront cost of securing inventory, automobile dealerships frequently have a problem managing their cash flow. Often, used car dealerships purchase inventory using a retail floorplan, a type of specialty line of credit, that typically requires the automobile to be paid off in full within 90 days of purchase. This means that automobile dealers use loans to finance their operations and therefore have an interest in selling vehicles as quickly as possible in order to use the proceeds to pay off the loan rather than paying off the loan out of their working capital. One difficulty that this presents to BHPH dealers is that when they sell a vehicle to a BHPH customer the RFC needs to produce the loan funds so the dealership will have the funds to pay off the line of credit on that automobile. Often a ‘cash crunch’ is a primary reason for dealerships to go out of business.

Regulations in the United States[edit]

Related finance companies are not regulated as strictly as banks by the Federal Reserve, rather they are regulated by the Department of Financial Institutions or Department of Commerce on a State level depending on the State. Regulations may include maximum interest rate, late fee amounts, grace periods and so forth. Some of the companies that have started as RFCs have grown large enough that they became Industrial Banks which are FDIC Insured banks owned by non-financial institutions.

References[edit]

1. ^ a b "'Buy Here, Pay Here' Businesses Move Into Leasing". All Things Considered. NPR. 2012-01-19. Retrieved 10 February 2012.
2. ^ http://www.sgcaccounting.com/Resources/BHPHBenchmarks2013.pdf[bare URL PDF]

If you need a car but have poor credit, buy here, pay here dealerships may seem like a good idea. Unlike most car dealers, buy here, pay here car lots finance your car directly rather than through a bank or credit union.

But while this may sound appealing, interest rates for buy here pay here car loans are typically higher than other lenders. The dealer may also charge more for the car than it’s worth after interest and fees are included. This article explains how buy here, pay here lots work and some alternate options, even if you have bad credit.

How buy here, pay here car lots work

When you go shopping at buy here, pay here car dealerships, you pick out a car and apply for financing, just like you would do at any dealerships. The difference is that the financing doesn’t come from a bank or credit union. Instead, it comes from the car lot, which is why it’s also known as in-house financing. The buy here, pay here dealerships may charge the maximum APR allowed by law in the state where they do business.

For example, you may pay up to 21% APR for cars older than two years in Pennsylvania, while North Carolina allows rates up to 29% APR for vehicles five years or older. If you got a buy here, pay here car loan for $10,000, a 29% APR for three years, you would pay just over $5,000 for the cost of the loan, on top of the $10,000 car. In this case, you would pay over half the car’s value just to get the loan. By comparison, the average used car loan rate across all credit scores in 2021 was 8.21%.

Buy here, pay here places can do this because it’s legal, and because some of their customers may think that they have no other way to get a car. Many states set limits on how much interest can be charged on a loan, but car dealers can also charge additional fees if customers agree to it. Many people who go to buy here, pay here places have been refused by other lenders for having poor or limited credit.

Are buy here, pay here car lots worth it?

If you can’t buy a car with cash and don’t have the credit to get a loan from lenders like banks, credit unions and online lenders — even those specializing in auto loans with no credit history or poor credit — you may feel like you have few options. Unless you live in a city with a great public transportation system, cars are necessary to get to work, pick up kids and get groceries. Buy here, pay here places also advertise with a lot of gimmicks to get you in the door, from giant inflatable King Kong figures on the roof to “free lifetime warranties.”

Pros

It’s the last resort. If you need a car quickly and can’t get an auto loan, the buy here, pay here dealerships may be your only option. But before you sign the deal, be sure to check out the other ways you could get a car, listed below.

Could build your credit score. If the dealership reports payments to the credit bureaus, you could improve your credit score by paying the loan on time and in full. This way, you might be able to obtain conventional, less expensive financing the next time you buy a car.

Cons

High APRs. Buy here, pay here car lots routinely charge high interest rates, up to the maximum allowed in the state or even higher if the buyer agrees. For example, the legal rate of interest in New York state is 16% for loans under $25,000, but dealers are also allowed to charge a Credit Service Charge at whatever rate the buyer and seller agree upon. The higher interest rate can make it more difficult to keep up with the payments.

High car prices. Buy here, pay here lots may sell cars for more than the market value. With higher interest rates, you may end up paying much more than the car is worth.

May not help your credit. Not every buy here, pay here dealer reports your payment history to the three major credit bureaus. Ask your salesperson if they report payments and to which agencies. Otherwise, you may lose the opportunity to improve your credit score.

Costly add-ons. The dealer may try to sell you a warranty and a GAP insurance policy as a condition of getting the loan. In addition, it’ll likely want you to add these extras to your loan amount, so your monthly payment and total interest paid would be higher than the vehicle alone.

Tracking and disabling devices. Some buy here, pay here lenders will require your car to be fitted with a tracking device to ensure they can repossess it if you don’t make the payments on time. Some devices will even disable the vehicle, so you can’t start it and drive away if you’re behind on payments.

Unfavorable terms. You may be required to make a high down payment so the dealer gets some of your cash from the start. A buy here, pay here dealership may require payments once a week or every two weeks, rather than the common once-a-month time frame, to make sure you’re staying up to date. You may also have to visit the lot in person to make payments with cash or a check. In addition, a dealer may offer what seems to be a competitive interest rate, but the price of the car could be inflated to make up for it.

Churning. Disreputable buy here, pay here car lots will churn or sell the same car several times in a year. The buyer may fall behind on payments or stop making them if the car is a lemon and doesn’t run right. The dealer repossesses the car as soon as legally possible and puts it back on the lot for the next unsuspecting buyer. The first buyer loses any money paid so far, including the down payment.

How do buy here, pay here car lots affect my credit?

Some buy here, pay here dealerships report your payment history to the credit bureaus, though others won’t — there’s no one-size-fits-all answer. The dealer’s website may say whether it reports or not.

On-time payments could help build or repair your credit score, so if that’s important to you, check with the dealer to make sure they do report your payment history. Payment history is one of the main factors in determining your credit score.

If the dealer doesn’t report to the credit bureaus, this loan won’t help build or repair your credit. However, if you miss payments or the car gets repossessed, it likely wouldn’t impact your credit score negatively, either.

Alternatives to buy here, pay here car lots

Before you settle for a buy here, pay here car loan, consider exploring other options. One alternative is a bad credit car loan, a conventional auto loan with higher interest rates for borrowers that have lower credit scores.

Pay cash. If you can wait, save up money to pay for a car in cash, or least make a down payment for a conventional loan. You’ll save money over the long run in lower interest rates. Plus, consider buying a used car and look for a vehicle that’s within your cash budget.

Shop around for a car. Check out the market prices using NADAguides or Kelley Blue Book so you know the car’s value — you don’t want to pay more than the car is worth. Instead of settling for what the dealership has on the lot, look at online sites such as Craigslist or buy a car at auction. You should also have an independent mechanic check out the car before you buy it.

Don’t assume a lender will say no. Even if you have poor credit, apply for a car loan from banks, credit unions and online lenders anyway — you may be pleasantly surprised at the result. And if you are turned down, talk with a loan representative to understand how you could be approved. You may find out that you only need a slightly larger down payment, for example.

Shop around for a loan. Apply to more than one lender, as not all lenders will view your application the same way. If a few lenders approve you for an auto loan, compare the loan offers and take the one with the cheaper APR. You can apply to multiple lenders within a 14-day window without hurting your credit score. Fill out an online form at LendingTree to receive up to five different auto loan offers from lenders, based on your creditworthiness.

Get a cosigner. Ask someone you know who has good credit and trusts you to cosign an auto loan.

In-house financing. Some franchised dealerships also have their own lending companies. Shopping for in-house financing at a dealership rather than going to a buy here, pay here lot could mean that you have access to a wider variety of cars and more lending options.

Improve your credit score. If you can wait to buy a car, work on improving your credit score — plus, devoting an effort to improving your credit can open up car loan options with lower interest rates. One of the best ways to improve your credit score is by paying your bills on time. Building a track record of not missing payments on loans or credit cards takes time, but will help you improve your score. If you’re behind on payments, bring them up to date as much as possible. You should also pay down the balance on credit cards to improve your credit utilization rate, which is the amount of your debt compared to the credit limits you have on the cards.

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