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

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In a Nutshell

Buy-here, pay-here loans can help borrowers with poor credit secure auto financing — but you could encounter a speed bump or two. These loans might not help you build credit, and they come with high costs — sometimes thousands of dollars 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 to borrowers with 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 key ways. These dealerships sell and finance the cars straight off their lots — you might see them advertise with “we finance” or “no credit, no problem.”

If you plan to buy a 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. Once the dealership determines the loan amount you qualify for, it will show you cars within that price range.

The average cost for a car on a buy-here, pay-here lot in 2017 was $7,201, and the average down payment was $801, according to an industry report from the National Independent Automobile Dealers Association. 

Drawbacks of buy-here, pay-here financing

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.

They 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. The average interest rate on this type of loan hovers around 20%, which is much higher than what you’d find at most banks and credit unions. Buy-here, pay-here dealers may also hit you with other fees.

In the third quarter of 2018, the average interest rate on a four-year, used-car loan was 5.31% from a bank and 3.44% from a credit union, according to a report from the National Credit Union Administration.

These high costs can result in financial trouble: About one in three borrowers defaulted on buy-here, pay-here loans in 2017, according to a report by the National Independent Automobile Dealers Association.

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.

They might not help you build credit

Making on-time payments 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.

The lender may install a tracking device

Because you might appear to be a bigger credit risk if you have low credit scores, dealers want to be sure they can easily repossess the car if you stop making your payments.

About two-thirds 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. But giving up a measure of your privacy may be a nonstarter for you.

Inconvenient payment structure

You may need to make weekly or biweekly trips to the dealership to make your payments, which can be inconvenient compared with making a payment online or by mailing a check.

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

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 local banks and credit unions. Some used car dealerships offer loans for borrowers with poor credit.

Look at the annual percentage rate, length of the loan, monthly payment and any fees for each loan option. 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

Go the old-school way and save up for a car with cash. Take steps to improve your credit over time, and eventually you may qualify to finance a newer car with a lower interest rate and use the pre-owned one as a down payment.

Buying a car: How much can you afford?

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.


Bottom line

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. This could help you compare interest rates and loan terms across lenders. Knowing your options can help you get the best deal for you on a car loan.