How Does Buy Here Pay Here Financing Work?

People were struggling with credit issues long before the COVID-19 pandemic, so the idea of buying and paying for a car at a car dealership is nothing new. However, since 2020, the prices of new and used cars have increased considerably due to production shortages and overvalued trade-ins. These two things have resulted in people buying cars on long-term contracts that rapidly lost their value. This has brought about $20 billion in delinquent auto loans in 2022, mainly from the 18 to 39 age group.

The pandemic brought about a lot of change to the economic landscape, and 30% of Americans say they went into debt during the pandemic due to income loss and inflation. If you've run into trouble by paying late on your credit cards and car loans, your credit score has likely suffered. If you have a low credit score, consider buy here pay here car lots as an option for a new car.

Buy-here-pay-here car lots (BHPH) allow buyers to not only buy another vehicle but can help them repair their damaged credit as long as the dealership reports the payments to the credit bureau.

When you take out a BHPH loan, the financing arm of the dealership holds the note, so you make payments directly to the dealership. This can benefit you if you cannot find traditional financing. 

BHPH car lots sell used cars to people with no credit or bad credit while allowing you to sit down with a lender and explain your credit history.

Some vehicles may be on the higher price end, like a fully-loaded truck, but with high mileage, while others fall into the low end both in value and price. Some vehicles may have been repossessed more than once by the same dealership.

When you're sitting across the desk from the lender at a BHPH dealership, you can explain any missed payments and gaps in job history and show documentation as to why you're a reasonable credit risk for them. 

Things you should know before you buy 

Despite the benefits of working with the dealership to secure a loan, the dealership is in it to make money, so there are significant pitfalls to signing a contract for a BHPH loan. 

AS IS 

Since the bulk of the buy here pay here cars that make up the BHPH inventory are low value, they are offered AS IS with no or limited warranty based on your state's requirements. Federal law requires all dealerships to post a Buyer's Guide in the car window spelling out the terms of the agreement. 

If you buy an AS IS car, you are responsible for any repairs needed, even if those repairs are needed the minute you drive off the lot. Read all of the documents carefully before signing, and if the dealership offers a limited warranty, you have that in writing and signed before you sign the paperwork. 

GPS or Inhibitor

BHPH lots sometimes place a GPS tracking device or ignition inhibitor on their buy here pay here cars to prevent problems if you default on your contract. Consent to track you is usually built into the contract terms, along with the other provisions and riders, on the flip side of the contract.

Short Terms

To minimize the financial risk to the dealership, the loan terms may be shorter than a traditional loan. The term length is affected by the make, model, and year vehicle. 

Fees

Dealerships generally charge extra fees for paperwork, loan securing, and other miscellaneous items. If you have to pay their fee, see if you can pay it in cash to lower your finance balance because these fees can be $400 or more.

Repossessions 

The dealerships quickly repossess vehicles since they are out of money if you default.

Buy here, pay here process 

It's easy to buy a car through a buy here pay here lot. If you see a sign or ad that says no credit check or bad credit welcome, chances are the dealership offers buy here pay here bad credit loans. 

Since not all cars on the lot may be available for buy here pay here bad credit loans, you need to tell the sales staff in advance that you need credit help. The dealership may not let you negotiate the price of the vehicle either.

Before you sign anything, ask about their credit reporting policy. Since you want to build your credit, the reporting will help you. Consider going to another dealership if they don't report to the credit bureau. 

After you've signed the finance paperwork, you'll receive a payment schedule. The dealership may ask for weekly or bi-weekly payments. Unlike traditional loans, where you can pay online or send in a check, the dealership may require you to come by their office with cash to pay. 

High-risk loans are written at high-interest rates, and a usury rate is the state's max cap rate for auto loans. Before signing a contract, determine your state's interest rate limit. Your buy here pay here bad credit loan may be written as a simple or add-on interest loan. Some states have laws that prohibit dealerships from using the Add On interest method on loans less than five years. 

Simple Interest

Interest is charged daily on the remaining principal balance. As you make monthly payments, the remaining principal balance decreases, lowering your interest due. This type of loan benefits someone who pays extra "principal only payments" or pays their contract off early. 

Add On Interest

Interest is determined at the beginning of the loan and added to the principal balance. Every month the payment is deducted from the total balance, which means you pay most of the interest in the first part of the loan. If you pay off the loan early, you may qualify for a rebate of overpaid interest. 

Buy here pay here bad car lots face the same FTC regulations as all car dealerships in the United States, which says they cannot misrepresent the vehicle and must disclose pricing during sales discussions.

The Tax Reform Act of 1986 requires BHPH car lots to establish a related finance company (RFC) and cannot co-mingle their finances. This means the RFC holds the loan and not the dealership, even though they may be the same company. 

RFCs are not regulated by traditional standards. However, all dealerships must adhere to the Truth in Lending Act and disclose the price paid for the vehicle, the interest charged, the total repayment amount, and all fees, including late penalty fees and prepayment penalties.

You can refinance a BHPH loan. If you have established a good payment history on your loan, your credit score may be higher, giving you more options. However, there are some challenges to getting a new loan.

• BHPH cars have higher miles;

• BHPH cars are worth less than the payoff balance on the loan;

• You will need more money down.

Every lender or finance company has vehicle guidelines that a BHPH car may not fit into, so check to see if your vehicle qualifies from the lender of your choice.

Here are some of the pros and cons of buying a car through a BHPH car lot:

Pros

• Reestablish your credit history – An installment loan on your credit report will boost your credit score.

• No credit needed – Since you're paying the dealership, you don't need a credit history.

• Take older trade-ins – If you have an older car, they may take that in on trade, even if they scrap it.

• Immediate decision – You don't have to wait days to determine if you're approved. 

Cons

• Hidden fees – The dealership could charge you a large processing fee.

• No credit bureau reporting – Unless they tell you they are reporting the credit, you can assume they are not. Even then, they may not report the loan.

• Limited inventory – The selection of BHPH cars is limited to older models with higher mileage.

• High-interest rates – The loans are typically set at a usury rate for your state.

If you have bad credit or no credit, you have other options besides getting into a loan at buy here pay here car lots. Here are a few of them:

• Co-signer on a loan – You might ask a relative to co-sign on a note.

• Cash – You could find a car for sale privately you could pay cash for.

• Subprime lender – You could look for a dealership with a secondary finance department. Third-party lenders usually finance these loans and not the dealership. You may be able to negotiate a better deal using dealership "invoice pricing."

• Car subscriptions – You could sign up for a car subscription that lets you buy a car short-term without credit.