What Is a Buy Here, Pay Here Loan?

“Buy here, pay here” financing is something that you may hear about at used car dealerships in your area. If you’re struggling to afford an essential vehicle, this could be the solution that you’re looking for. However, it’s important to understand how this option works so you can decide whether to buy here, pay here financing is right for you.

What Does Buy Here, Pay Here Mean?

A buy here, pay here (BHPH) loan is a financing option in which the car dealership both sells the vehicle and provides financing for it. BHPH dealerships typically cater to customers with a low credit score who would have trouble securing financing through a bank or other lending institution. Though these loans don’t always offer the most favorable terms, they are some of the easiest to secure, making vehicle ownership available to those who might otherwise struggle to get a car.

How Buy Here, Pay Here Loans Work

A BHPH loan is provided to the car buyer by the dealership itself. This means that the dealership is taking on the risk associated with providing financing. If the buyer is unable to pay the loan and defaults on it, it is the dealership that’s responsible for repossessing the car and the dealership that takes a financial hit. However, this financing option eliminates the middleman, so you as a buyer will work directly with the company that’s providing funds for your vehicle.

When you purchase a car with a BHPH loan, you will typically address financing before you look at vehicles. Most BHPH dealerships don’t run a credit check, so your score won’t impact the terms of the loan. The dealership will likely ask for your income and contact information. With this in mind, they will suggest a price range that suits your needs.

After you’ve addressed the financial aspect of your vehicle purchase, you can look at available cars that are within your means. This is the reverse of how other types of dealerships work. With more traditional financing, you would typically explore vehicles first and address financing after you’ve chosen a car.

Benefits of Buy Here, Pay Here Loans

There are some benefits of BHPH loans that make these a viable choice for car buyers who are in a difficult financial situation. A BHPH loan is advantageous to some because:

• It is available with low or no credit. Most loans base their terms on your credit score. If you have a high credit score, you can enjoy a lower interest rate, while those with a lower credit score pay more in interest. With a BHPH loan, your credit isn’t taken into account, so you can get financing even if you have a low credit score or haven’t established your credit yet.
• You can customize your terms. Many dealerships will work with you to find the most beneficial terms for your situation. If you need a due date in the middle of the month after your first paycheck, this is something you can discuss to make sure it’s as easy as possible for you to keep up with your payments.
• You can purchase a car quickly. Most BHPH dealerships make it possible for you to secure financing on the spot. If you find yourself in an unexpected situation without an essential means of transportation, a BHPH loan may provide a fast answer to your problems.

Drawbacks of Buy Here, Pay Here Loans

A BHPH loan is best suited to individuals who are unable to secure financing from other institutions. #1 Cochran has alternatives that will save you from the dangers of buy here, pay here financing. A BHPH loan can be problematic because:

• Interest rates are typically high. Though BHPH loans aren’t as expensive as some would lead you to believe, they are usually more expensive than other types of vehicle financing. The average interest rate for 36-month used car financing is 3.31% from a credit union and 5.25% from a bank. Meanwhile, a BHPH loan may have an interest rate closer to 20%.
• You might not build credit. Since BHPH lenders don’t check your credit score, they also don’t report your payment history. This is helpful if you can’t make your payments on time, but detrimental if you’re making your payments and want to increase your credit rating.
• The vehicle may have a tracking device. BHPH lenders often install tracking devices on their vehicles. Since a BHPH loan is riskier than other types of loans, these dealerships want to make sure they know where their vehicles are. This makes it easier for them to repossess the car if you miss a payment. This may feel like an invasion of privacy for you as a car owner.
• The payment structure is less convenient. Many BHPH dealerships require payments weekly or biweekly in cash. This requires frequent trips back to the dealership.

Alternatives to Buy Here, Pay Here Loans

BHPH loans are far from your only option when you’re purchasing a vehicle. Some options that you should consider include:

• Dealer-arranged financing: Many dealerships offer other, more favorable financing options onsite. Dealer-arranged financing is not the same as BHPH financing. When you secure traditional financing through a dealership, the dealership simply communicates with the lending institution on your behalf. Some dealerships even offer down payment assistance and other perks.
• Bank or credit union financing: If you belong to a bank or credit union, it’s worth checking with them to see what financing options they can offer you. If you have a good credit score and an established relationship with one of these financial institutions, you may get a great deal.
• Paying in cash: Whenever possible, the best option is to pay for your vehicle in cash. This frees you from the cost of interest. Consider a used vehicle rather than a new one if this will make the difference between financing the car or buying it upfront.

If you’re interested in purchasing a new or used vehicle from #1 Cochran, we can help you explore your financing options and find the right choice for your needs. Avoid Buy Here Pay Here places and instead rely on a reputable dealership. #1 Cochran offers the “Path Program” as an alternative.