Buy-here, pay-here financing: What you need to know

Young woman holding cell phone and walking in parking lotImage: Young woman holding cell phone and walking in parking lot

In a Nutshell

Buy-here, pay-here loans can help people with poor credit secure auto financing. They’re offered by car dealerships that provide in-house financing — meaning the dealership both sells and finances its cars. But you may encounter a speed bump or two with buy-here, pay-here financing. These loans might not help you build credit and can come with high costs — sometimes thousands more than the car is actually worth.

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If you have less-than-stellar credit, it may be tough to get approved for a car loan. Some car dealerships offer “buy-here, pay-here” financing to borrowers with poor credit — but it comes at a price.

With buy-here, pay-here loans, the car dealership acts as both the seller and the lender by offering in-house financing. Dealers sometimes advertise these loans as “no credit check” loans, which can make them especially appealing 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?

When you buy and finance a car at a traditional car dealership, you choose a car and then the dealer typically passes your information to a network of potential third-party lenders. If you’re approved for a car loan, you make monthly payments to the lender that finances the loan.

Buy-here, pay-here dealerships flip the car-buying process in a few ways. These dealerships sell and finance used cars straight off their lots — you might 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 residence, but the dealer typically won’t check your credit. You’ll likely also need a down payment.

Cars on buy-here, pay-here lots tend to be older, low-value vehicles. The average cost for 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 Independent Automobile Dealers Association.

Once the dealership determines the loan amount you qualify for, it will show you cars within that price range that you can choose from. You’ll then make your car payments directly to the dealership.

Is buy-here, pay-here financing a good idea?

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 host of expensive and inconvenient drawbacks.

Buy-here, pay-here financing can be expensive

Buy-here, pay-here dealerships may not cut you any slack 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 hovers around 20%, which is much higher than what you’d find with 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 from the National Credit Union Administration.

Buy-here, pay-here dealers may also hit you with other fees. These high costs can result in financial trouble: More than one in three borrowers defaulted on buy-here, pay-here loans in 2019, according to a 2019 report by the National Independent Automobile Dealers Association and the National Alliance of Buy Here, Pay Here Dealers.

On top of the high interest and fees, you might end up paying a lot more for your car than it’s worth. Traditional lenders generally limit the loan amount based on the vehicle’s value. But buy-here, pay-here dealerships may not set those limits, meaning you might borrow — and pay — more than the car is worth. This could put you upside down on your loan as soon as you drive off the lot.

A buy-here, pay-here lender may 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, helping the dealer recover the vehicle if you default on the loan. Giving up a measure of your privacy may be a nonstarter for you.

Buy-here, pay-here loans can come with an inconvenient payment schedule

You may need to make weekly or biweekly to the dealer, which can be inconvenient compared with a monthly payment plan. And the payment goes directly to the dealer, not a bank, so options for how you make your payment (pay by phone, check, etc.) may be more limited than with a traditional auto loan.

Does buy-here, pay-here financing go on your credit?

Making on-time payments in full 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 main consumer credit bureaus. So even if you’re keeping up with your payments, you may not reap the benefits of building credit.

Alternatives to buy-here, pay-here financing

Don’t be fooled into thinking that a buy-here, pay-here car loan is your only option. Here are a few alternatives to consider.

Shop around for financing

If buy-here, pay-here financing 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 that offer auto loans for bad credit. While these lenders may charge higher interest rates, they might be willing to overlook certain negative marks on your credit reports, gradually reduce your annual percentage rate, or APR, or waive the down payment.

With any of these options, you’ll want to make sure the loan is affordable. Check the annual percentage rate, length of the loan, monthly payment and any fees involved. Also ask if the lender will report your payments to the main consumer credit bureaus, which can help you build a credit history.

Pay cash for a pre-owned car

You can also skip the credit check and financing altogether if you save up for a car with cash. Pre-owned vehicles cost about 30% less than brand-new cars on average, according to Edmunds data. Some auto dealerships, such as CarMax and Carvana, have plenty of used cars on hand at various price points.

A potentially cheaper option is buying a used car from a private seller. While you’ll need to handle the paperwork and transfer of ownership yourself, you’ll 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 spotty credit history, adding a co-signer to the car loan may help you get approved. Ask a trusted friend or relative who has a healthy credit history and understands the risks. If you fail to make a payment, the co-signer is on the hook to pick up the slack. Missed or late payments appear on both borrowers’ credit reports, which can hurt both of your credit.

Save for a down payment

If you can hold off on your car purchase, consider taking the time to save for a down payment. Once you’ve saved enough money, the down payment may help you qualify for an auto loan with a lower interest rate.


What’s next?

Even if you have low credit scores, a buy-here, pay-here auto loan may not be your best option. You could end up paying way more than your car is worth, along with hefty interest costs.

Before you head to a buy-here, pay-here lot, check your credit and consider applying for preapproval from a few lenders who consider people with bad credit. This could help you compare interest rates and loan terms across lenders and find the best deal for you on a car loan.


About the author: Kim Porter is a writer and editor who has written for AARP the Magazine, Credit Karma, Reviewed.com, U.S. News & World Report, and more. Her favorite topics include maximizing credit… Read more.