What is "buy here, pay here" financing?

Buying a car is a significant expense. In most cases the buyer provides a down payment or trade-in, and the rest of the money is borrowed either directly from a traditional lender, such as a bank or credit union, or is arranged by the dealership through a lending institution. But if you’re having trouble financing a car through these traditional routes due to low credit score or income, "buy here, pay here" financing may be an option. With “buy here, pay here” the car lot funds the loan and ongoing payments are made to the dealer. If you’re wondering if “buy here, pay here” is right for you, let’s take a closer look.

"Buy here, pay here": Pros and cons

It’s important to understand some of the potential pros and cons.

Potential pros

These are some possible benefits of "buy here, pay here":

• Qualifying: "Buy here, pay here" financing usually has more flexible credit standards. You may have felt that buying a car — whether used or new — was beyond your reach, but “buy here, pay here” may make it possible. Perhaps you’ve been struggling with poor credit, or you applied for a car loan with a traditional lender and were declined. A "buy here, pay here" dealer could be your answer.
• Convenience: Another potential appeal is the convenience factor. You buy and finance the car with the same company, under the same roof. There’s no searching for other lenders, making additional phone calls or organizing paperwork beyond what the dealership you’re purchasing from requires.
• Credit building: Financing a car this way may give you a chance to build your credit and improve your credit score. Of course, this requires you to make your loan repayments in full and on time. It also would require the dealership to report the payments it receives from you to the major credit agencies. Note, however, that not all dealerships are required to report these payments to credit agencies, which means your credit score may not reflect the repayments you’re making.

Potential cons

"Buy here, pay here" financing may get you a new set of wheels more easily than you expected. However, potential drawbacks to consider with “buy here, pay here” include:

• Higher interest rates: While every situation is different, "buy here, pay here" rates are generally higher, and lower credit scores of "buy here, pay here" customers typically correlate to a higher cost of borrowing (and an increased annual percentage rate, or APR).
• Fees and charges: Details matter with any loan agreement, and it’s no different with "buy here, pay here" financing. Are there potentially unclear costs bundled into the purchase agreement you’re being asked to sign? Maybe the loan includes lots of fees at origination and requirements for taking out an extended warranty or specialty insurance that you believe you don’t want or need.

Knowing your rights

You may want to do a little research on any applicable rules or protections in the state where you’re trying to buy. For example, some states may place limits on the maximum annual percentage rate that "buy here, pay here” lots can apply to an auto loan.

Also, are you able to find out the average interest rate for used car loans in your state? This figure, if available, may be a useful guide when gauging potential financing offers from "buy here, pay here” dealerships. For inquiries such as these, your state’s attorney general’s office or website is often a good place to start.

Calculating your repayments

Based on your financial situation, consider what level of monthly car payment you can reasonably afford, and over what timeframe. Look online for an auto payment calculator that provides estimated payment amounts after you input a potential loan amount, term of repayment, and other details.

Shopping around

Reviewing the marketplace for different APRs at other “buy here, pay here” dealerships is another smart move. Keep shopping until you find the rate that’s acceptable to you.

Reviewing the costs

Requesting and carefully reviewing a full breakdown of costs prior to agreeing to anything is generally in your best interest. And even if you feel your financing choices remain limited, that doesn’t mean you shouldn’t try to negotiate the terms to get the best deal possible.

Planning for problems

Used cars can run into mechanical and other problems that you may not foresee from a visual inspection of the vehicle or during a test drive. To help protect yourself in the event of unexpected problems, get answers to such questions as:

• Does the car come with a warranty, and what kinds of scenarios might the warranty cover?
• What happens if the vehicle develops mechanical or other problems soon after you take ownership? Is there a “lemon law” where you live?
• What recourse do you have, if any, should you wish to return the car for any reason?

Obtaining a vehicle history report may give you helpful information when deciding whether to forge ahead with a purchase. You may also want to consider having a trusted mechanic perform a pre-purchase inspection.

Alternatives to "buy here, pay here" financing

While "buy here, pay here" financing may seem appealing, it might not be your only approach. Other avenues toward obtaining traditional financing might include:

• Increasing your down payment (if possible): In general, the more down payment you’re able to put toward the purchase price of a car, the greater the chances of a traditional loan approval on the remaining amount.
• Building up your credit score: Making full, on-time payments for other debts you might have, such as credit cards, and keeping your credit utilization relatively low are recommended ways of potentially strengthening your credit score over time, and becoming eligible for traditional financing.
• Inquiring with franchised dealerships: Sometimes franchised dealerships run special financing programs, often in conjunction with the auto manufacturers themselves, that you may be eligible for. You don’t know if you don’t ask.
• Asking traditional lenders about any loan assistance programs they may offer: Even if you don’t qualify for a standard auto loan at this time, some banks and credit unions may provide lending options for those with no credit history or lower credit scores.

In summary

You now have a better idea of what "buy here, pay here" is and how it may provide an option for prospective purchasers who are otherwise struggling to obtain a traditional car loan. However, some “buy here, pay here” programs include charges and terms that you may decide are ultimately too costly for you.