If you have less than stellar credit, it can be difficult to get approved for a car loan. Some car dealers offer “buy here, pay here” financing to borrowers with bad credit, but it comes at a price.
With buy here pay here loans, the car dealer acts as both a seller and a lender by offering in-house financing. Dealers sometimes advertise these loans as “no credit check” loans, which can make them especially attractive if you have low credit scores.
Buy here, pay here loans may sound like a lifesaver, but their high costs probably aren’t worth it. let’s take a look at how they work.
- How does buy here, pay here financing work?
- Is buy here, pay here financing a good idea?
- Does the financing buy here, pay here go to your credit?
- alternatives to financing buy here, pay here
How does buy here, pay here financing work?
When you buy and finance a car at a traditional auto dealer, you choose a car, and then the dealer typically passes your information on to a network of potential third-party lenders. If you are approved for a car loan, you make monthly payments to the lender financing the loan.
Buy here, pay here dealers change the car-buying process in several ways. These dealers sell and finance used cars directly from their lots; you may see them advertise with “we finance” or “no credit, no problem”.
If you plan to buy a used car through a Buy Here Pay Here dealership, you may be asked to verify your income and proof of residency, but the dealership will not normally check your credit. you may also need a down payment.
Cars on buy here, pay here lots tend to be older, low-value vehicles. The average cost of a car on a buy-here-pay-here lot in 2018 was $7,004, and the average down payment was $950, according to a 2019 industry report from the National Association of Independent Automobile Dealers.
Once the dealership determines the loan amount you qualify for, they’ll show you cars within that price range to choose from. then you’ll make your car payments directly to the dealer.
Is it a good idea to buy here, pay here?
Buy here pay here loans are touted as an easy way for people with bad credit to qualify for financing, but they come with a number of costly and inconvenient drawbacks.
buy here pay here financing can be expensive
Buy here, pay here dealers may not make light of you when it comes to the interest you’d pay on a loan. According to a 2018 Niada study, the average interest rate on this type of loan is around 20%, which is much higher than what you’d find on an auto loan at most banks and credit unions.
In the third quarter of 2020, the average interest rate on a four-year used car loan from a bank was 5.32% and 3.24% from a credit union, according to a report of the national administration of savings and credit cooperatives.
Dealers who buy here and pay here may also charge you other fees. These high costs can lead to financial problems: More than one in three borrowers defaulted on buy here, pay here loans in 2019, according to a 2019 report from the National Association of Independent Automobile Dealers and the National Alliance of Buy Here, Pay Here. dealers here.
In addition to high interest and fees, you may end up paying a lot more for your car than it’s worth. Traditional lenders typically limit the loan amount based on the value of the vehicle. But buy here, pay here dealers may not set those limits, meaning you can borrow, and pay, more than the car is worth. this could put you upside down with your loan as soon as you leave the lot.
A lender who buys here, pays here can install a tracking device
Dealers want to be sure they can easily repossess the car if you stop making your payments. About 45% of Buy Here Pay Here dealers install devices that track the car or can prevent it from starting, which helps the dealer repossess the vehicle if you default on the loan. giving up a measure of your privacy may be a failure for you.
buy here pay here loans can have an inconvenient payment schedule
You may be required to make weekly or bi-weekly payments to the distributor, which can be inconvenient compared to a monthly payment plan. And the payment goes directly to the dealer, not to a bank, so your options for how to make your payment (pay by phone, check, etc.) may be more limited than with a traditional auto loan.
Does the buy here, pay here financing go to your credit?
Making payments in full on time can help improve your credit and help you appear less risky to future lenders. But some Buy Here Pay Here lenders may not report your payment history to the major consumer credit bureaus. therefore, even if you are current on your payments, you may not reap the benefits of building credit.
alternatives to buy here, pay here financing
Don’t be fooled into thinking a buy here pay here loan is your only option. here are some alternatives to consider.
look for financing
If buy here, pay financing here is all you’ve considered so far, look elsewhere. Start by checking your credit scores, then compare auto loan quotes online and at credit unions and banks. credit unions may be more willing to work with members who have less than perfect credit.
Also check out lenders who offer auto loans for bad credit. While these lenders may charge higher interest rates, they may be willing to ignore certain negative marks on your credit reports, gradually lower your APR, or waive your down payment.
With any of these options, you’ll want to make sure the loan is affordable. Check the annual percentage rate, the length of the loan, the monthly auto loan payment, and any fees involved. Also ask if the lender will report your payments to the major consumer credit bureaus, which can help you build a credit history.
pay cash for a used car
You can also skip the credit check and financing if you save cash for a car. Used vehicles cost about 30% less than new cars on average, according to data from Edmunds. Some car dealers, such as Carmax and Carvana, have many used cars available at various prices.
A potentially cheaper option is to buy a used car from a private seller. While you’ll need to handle the paperwork and transfer of ownership yourself, you could pay even less for the vehicle in a private transaction. just make sure you do your homework. Getting a vehicle history report and paying for an inspection can help protect you from buying a lemon.
get a co-signer
If you have a spotty credit history, adding a co-signer to your car loan can help you get approved. ask a trusted friend or relative who has a healthy credit history and understands the risks. if you miss a payment, the co-signer is on the hook to pick up the slack. Missed or late payments show up on both borrowers’ credit reports, which can hurt your credit.
save for down payment
If you can put off your car purchase, consider taking the time to save for a down payment. once you’ve saved enough money, a down payment can help you qualify for a car loan with a lower interest rate.
Even if you have low credit scores, a buy here pay here loan may not be your best option. you could end up paying much more than your car is worth, along with high interest costs.
Before you head to a lot buy here, pay here, check your credit and consider getting pre-approved from some lenders who consider people with bad credit. This could help you compare interest rates and loan terms between lenders and find the best deal for you on a car loan.