Buying a new or used vehicle can be tough for just about everyone, and if you have poor credit, then the process often seems impossible. This is why Buy Here Pay Here dealerships have become so popular – they give people who couldn’t hope for traditional bank financing a chance to buy a new vehicle. And while that’s great, it’s important to remember that they are not the only game in town. After all, BHPH loans typically have very high interest rates that can potentially double the overall price of a vehicle in the long run.
Choosing how you want to finance a new or used vehicle is a big decision and one you should not enter lightly. After all, you’re probably going to be making payments on your car or truck for a few years, and it’s important to know what your risks are if you have any issues with making a few payments or encounter other financial difficulties. Some of the alternatives to BHPH financing are going to only be available to people in pretty specific situations. But even if you have poor credit, don’t despair – you’re not alone, and you still have some options available to you.
Traditional Financing
This may seem a bit obvious, but one option that a lot of people with less-than-great credit overlook is the possibility of financing from a traditional third-party lender. This is usually a bank or similar organization and is basically the most common way people have been buying vehicles for decades. You get a loan from the bank or other lender and pay it back over a few years, including interest.
Of course, a lot of people worry about qualifying for a loan from a third-party lender like a bank, especially if your credit is not great. The success of BHPH dealerships, however, has shown some lenders that potentially “high-risk” borrowers are still worth looking at for a loan on a vehicle. While it’s true that you might not qualify for a traditional financing option, you never really know unless you look into it. A lot of dealerships and online car sellers are able to help you find financing options through traditional methods even if your credit is not as good as you’d like it to be.
Pay in Cash
One of the best alternatives to a BHPH dealership is to pay for an entire vehicle’s cost up front without worrying about any kind of loan. Admittedly, not everyone is in a situation where they can manage the upfront costs of a vehicle’s entire sticker price. However, if you do have the money to do this, then you don’t have to worry about lenders or interest rates at all. That is why this is often considered the most cost-effective way to buy a new vehicle, whether it is pre-owned or brand new.
One thing to consider with this method, however, is that in some situations it might actually not be the best way to go. For example, if you are able to qualify for a loan with very low interest rate from a bank, then you might actually be better off investing the money you would spend on the car in something that yields a higher rate of growth than the interest. This way you would actually gain more money over time than you spend on the interest.
Of course, all of these details can greatly impact what you should do – including specific interest rates on any loan you qualify for and your investment opportunities. Also be sure to look at all the details about a low-interest loan. In some cases, you might be better off trying to negotiate a lower asking price and pay in cash, rather than get a low-interest loan that is only offered if you pay the full MSRP.
Home Equity Loans
If you’re a homeowner, then you might be able to get a vehicle loan from a mortgage lender, either as a single home equity loan or as a home equity line of credit. In either situation, you use the value of your home to pay for a new vehicle, without having to worry about going through another lending institution. This can be very advantageous if you’re in a situation where you have a house, but you also have poor credit.
The big risk here, however, is that when you use a home equity loan or line of credit, you are using your house as collateral for the loan or credit line. With a traditional loan from a lender, or from a Buy Here Pay Here dealership, the vehicle you are buying is used as collateral for the loan. That is why if you are unable to pay on the loan, the bank or lending dealership is able to repossess the vehicle. With a home equity loan, if you end up in a difficult position and cannot make payments on the vehicle, then your house can be at risk.
401(k) Loans
This is, admittedly, not something everyone will have access to, but it’s worth keeping in mind in case it might be an option for you. In some cases, it is possible to borrow from a 401(k) retirement plan and use this money to finance a new vehicle. This helps you completely avoid the process of looking for a third-party lender or limiting your search to a BHPH dealership and just go through a program you already have in place.
There are some drawbacks to consider here, however, since you’re tapping into your future retirement funds. For one thing, your payments will typically come right out of your paycheck, rather than from a bank account. You’ll also have some potential tax issues and early withdrawal penalties to worry about if you cannot pay the 401(k) loan back within a certain period of time. And if you change jobs or 401(k) plans, you might have to pay the entirety of the loan back within a very short period of time or face even more serious penalties.
In general, it’s best to talk to your 401(k) plan administrator at your place of work before taking this kind of loan to pay for your vehicle. Your administrator can go over any specific details you should know and help you weigh the pros and cons of such a loan before taking it.
Use a Credit Card
Depending on your credit limit and the type of credit card you have, you might also be able to use a credit card to purchase a vehicle. You might only be able to place part of the purchase on the card, and you might have to use a cash advance to make the purchase. This all depends on the specific terms and conditions of your credit card, but the dealership you work with can help you figure these kinds of things out.
One very important thing to note about using a credit card to buy a car is that you’ll typically do so using a credit card draft. This often has a very low interest rate, which makes it very attractive. Keep in mind, however, that this is typically an introductory rate and it can go up dramatically after the introductory period ends. If you’re not careful, you can end up paying extremely high interest on a vehicle you buy with a credit card. Using it for a cash advance to help with part of your purchase, and then paying that off as quickly as you can, is often the best choice if you go this route.
