Written by: Erica Sandberg
Edited by: Lillian Guevara-Castro
You’ve seen the used car commercials: “Bad credit, no credit? We have instant financing!”
Although enticing, the Buy Here, Pay Here (BHPH) model often isn’t all it’s cracked up to be. Dealerships that offer such arrangements cater to customers who are poor credit risks, and the company makes up for the increased potential for default in several ways.
Having a reliable vehicle is important, but so is the way you pay for it.
Pitfalls | Alternatives | FAQs
6 Buy Here, Pay Here Pitfalls
The more you know about BHPH, the faster you may hit reverse and shift your attention toward viable alternatives.
1. High Interest Rates
The great thing about financing a car is that you can get super-low interest rates — as long as your credit rating is good, that is. When it’s not, the rates can be astronomical.
According to Experian’s 2019 State of the Automotive Finance Market report, the average financing interest rate at independent used car dealerships for someone with excellent credit scores (781 to 850) is 4.63%. For a person whose scores are very low (300 to 500), though, the average interest rate was 20.39%.
So, how would the different rates translate to dollars? Imagine the price for the car you bought is $15,000 and the payoff term is 36 months (three years). With an interest rate of 4.63%, the monthly payment would be around $447, and the total interest would be $1,095.
If the rate is 20.39%, the payment would be $560, and the total interest would be $5,176. So, not only would the payment be $114 more each month, it would cost an additional $4,081 in interest charges over the term of the loan.
2. Extra Fees
All dealerships are required to be transparent about the total costs involved in the sale of the car, but you must be careful to review all the paperwork thoroughly. There may be a whole host of fees added on, such as application, administration, inspection, and delivery fees.
Question every charge. Some of those fees may not be added to a contract drawn up by a different dealer or finance company.
3. Long Payoff Terms
The faster you can pay off a loan, the less it will cost you in the end. Prepare for major sticker shock if the only way you can drive off the lot is with BHPH financing for 60 months (five years).
As you can see in the chart above, that $15,000-vehicle at a 20.39% rate would end up costing you $9,040 in total interest for a total payout of just over $24,000. In short, a high interest rate coupled with a long payoff term is a recipe for financial disaster.
4. Swift Repossessions
The car you purchase acts as collateral, so if you don’t make your payments as promised, the lender has the right to repossess the car. Although any lender can claim a car after you’ve missed payments, BHPH dealerships can be especially fast and unforgiving.
Make even one late payment and you may find a tow truck pulling the car out of your driveway. Repossessions are very expensive to recover from, too, since you’ll have to pay for the tow and daily storage fees.
If you don’t have the money to buy it back, the car could be auctioned off, which means you could be held responsible for a large deficiency balance — the difference between an amount that is owed on a secured loan and the amount that the collateral is sold for. If you don’t pay, the lender can sue you and use various methods to collect the money you owe, including garnishing your wages or taking funds from your bank account.
5. May Not Build Credit
Most lenders furnish the three major credit reporting bureaus with regular information about your loan, but not all BHPH dealers do.
If you’re wanting to turn your poor credit rating around by making all your payments on time and satisfying the loan agreement, be sure to check that they participate in the credit reporting system.
However, don’t take a “yes” as all is well. Ask if they report to one, two, or all three bureaus.
You’ll want all of the bureaus to be notified so your credit scores will be consistent.
6. Undesirable Vehicle Selection
You may have a car in mind when you walk onto the lot, but if you’ll be using the dealership’s BHPH financing, there’s a strong chance it won’t be among your options.
After calculating how much you can afford to pay on a monthly basis, you’ll be led to the vehicles that fit your financial parameters. The cars you will be shown may be older than you want, have high mileage or some kind of damage, or generally be models you’re not interested in.
Oh, and they may also be overpriced, too.
3 Alternatives to Buy Here, Pay Here Lots
Thankfully, you don’t have to use a BHPH lot to drive away with a quality car that won’t cost you an arm and a leg. You may want to wait a few months and save money for a down payment, a strategy that will lower the interest rate you’re offered.
Or, do what it takes to improve your credit rating so you can qualify for a better interest rate. Use the credit products you have now responsibly by paying on time and in full. After six months, your scores will see a strong upward swing.
Be sure to visit highly rated auto dealer networks, as well. These companies partner with many dealers, all eager to provide loans to consumers with a wide variety of credit issues. Among the best:
- Network of dealer partners has closed $1 billion in bad credit auto loans
- Specializes in bad credit, no credit, bankruptcy and repossession
- In business since 1999
- Easy, 30-second pre-qualification form
- Bad credit applicants must have $1500/month income to qualify
- See application, terms, and details.
| Interest Rate | In Business Since | Application Length | Reputation Score |
|---|---|---|---|
| 3.99% - 29.99% | 1999 | 3 minutes | 9.5/10 |
Auto Credit Express specializes in helping people with bad or no credit, or who have filed for bankruptcy and had other vehicles repossessed. They’ve been in business since 1999, and during that time have closed $1 billion in bad credit auto loans.
To qualify, the only requirement is that you have at least a monthly income of $1,500.
- Free, no-obligation application
- Specializes in auto loans for bankruptcy, bad credit, first-time buyer, and subprime
- Affordable payments and no application fees
- Connects thousands of car buyers with auto financing daily
- See application, terms, and details.
| Interest Rate | In Business Since | Application Length | Reputation Score |
|---|---|---|---|
| Varies | 1994 | 3 minutes | 9.0/10 |
The Car.Loan.com dealer network focuses on auto loans for people who’ve had past bankruptcies, are first-time buyers, and have subprime credit ratings. There are no application fees and same-day approval is available.
You can use its Loan Estimator tool to see how large of a loan you may qualify for or calculate how much your monthly payment will be with its Payment Calculator.
- Loans for new, used, and refinancing
- Queries a national network of lenders
- Bad credit OK
- Get up to 4 offers in minutes
- Receive online loan certificate or check within 24 hours
- See application, terms, and details.
| Interest Rate | In Business Since | Application Length | Reputation Score |
|---|---|---|---|
| Varies | 2003 | 2 minutes | 7.5/10 |
Interested in buying a new car? MyAutoloan.com provides vehicle loans to people with bad credit, whether they’re interested in used cars or cars that have just rolled off the assembly line.
Just a few minutes after completing the application, you’ll receive up to four loan offers, and then you’ll get an online loan certificate or a check to use within 24 hours.
Can a Buy Here, Pay Here Lot Hurt Your Credit?
As with any credit product, the way you treat the loan is essential to keeping your credit in tip-top shape. Because BHPH financing arrangements are usually geared toward people who have had trouble paying their past obligations, the chances are higher that problems will reoccur.
Late payments aren’t reported to the credit bureaus until the payment is at least 30-days past due.
If you do miss a payment, and the lender reports to the credit reporting bureaus, your scores will take a hit. Payment history is the most important credit scoring factor, so even a single negative notation will have an impact.
In fact, if you already have a report that is dotted with delinquencies, it will have an even worse effect. Consequently, you’ll have to be especially careful to meet the terms of the agreement so this doesn’t happen.
That means making sure you can afford the monthly payment. BHPH financing is not for people who merely hope they will have the funds available.
Can a Buy Here, Pay Here Lot Sue You?
If you do not make your payments as agreed to and the car is repossessed, you have the option to buy it back. Unfortunately, it’s going to include a whole host of tacked-on fees as well as any owed payments plus the interest that’s been accumulating.
If you can’t pay and the car is sold at auction for less than what you owed, the lender bears the right to sue you in a court of law for the difference. That would be a brutal reality check.
Not only would you owe a large amount of money for a car you don’t even own anymore — not to mention the damage to your credit — but it is also possible that a wage garnishment order may go into effect. If so, a portion of your earnings will be sent to the lender until the debt is cleared.
Does the Lemon Law Apply to Buy Here, Pay Here Dealers?
Lemon laws were designed to protect consumers from being stuck with bad cars. These laws are state-specific, but in most states, the car would have to have a substantial defect, be covered by warranty, and the defect would need to continue after a reasonable number of attempted repairs.
The problem is, lemon laws are typically for new cars, not pre-owned ones. Still, some states have taken a stronger stance and enforce a variation of lemon laws for used cars.
These states include Connecticut, Massachusetts, Minnesota, New Jersey, New Mexico, and New York. BHPH laws are also emerging. For example, in California, BHPH dealerships must issue 30-day/1,000-mile warranties for used vehicles.
Avoid BHPH When Possible
In general, buy here, pay here dealership financing is to be avoided. Explore all reasonable alternatives so you stay clear of dealerships that entice car shoppers with their in-house financing.
Clearly, plenty of other financing deals are out there that won’t limit you to certain types of cars or charge you an astronomical interest rate. With time and effort, you can improve your financial circumstances and strengthen your ability to obtain an interest rate that won’t drive your finances off a cliff.
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