Car Buyer Labs

Car Buying Advice, Tips, and Reviews

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A Buyer’s Guide to Buy Here/Pay Here Financing

If money is no object for you, then buying a car is probably an enjoyable experience. Filled with the opportunity to peruse and choose the car you want at your leisure. For a lot of people, however, shopping for a vehicle can be very stressful, especially when it comes to paying for a vehicle. Different financing options can be confusing, with a lot of different terms and ideas to understand. To make things easier, let’s look at Buy Here Pay Here vs Traditional Loans and see how they function.

I’ll look at how these types of financing work, breaking down their pros and cons for you. Then we’ll do a quick, direct comparison to make sure you know exactly what each entails. No matter what your financial and credit situations look like, you must understand your options.

Traditional Loans

So first things first, a traditional loan typically comes from a bank or credit union – though some other financing institutions can also provide loans. The point is that the loan comes from a third-party, not from the dealership itself or a lending company that they own. When you shop for a car with a traditional loan, you typically go to a dealership, look for a vehicle that meets your needs, then apply for financing.

At that point, the dealership will see what kind of loan you qualify for from a bank or other lenders based on a credit check. The better your credit, the better the terms of the loan you can qualify for – both in terms of how much they’ll loan you and how low the interest rates are. If all goes well, then you get the loan from the lender to buy the car, and you drive away in your new vehicle – though you’ll usually need to make a down payment that day.

With traditional loans, the bank owns your car while you pay off the loan over several years, making payments each month to your lender. At the end of the term, once the loan is paid off, then you take full ownership of the vehicle, and it’s yours. Interest rates from banks and credit unions on auto loans are typically pretty low – usually, around 5% though they can be higher or lower depending on your credit and the lender.

The biggest drawback with a traditional loan is the credit check – if you have poor credit or no real credit built up, then you can be denied a loan from all of your lending options. If you do get a loan, then paying it back on time to the lender will help improve your credit, which can make it easier to get your next vehicle loan and provide you with better terms.

Buy Here Pay Here Financing

With Buy Here Pay Here (BHPH) financing, however, the dealership that you go to is much more involved with the lending process to get you a vehicle. Rather than receive a loan from a third-party lender, like a bank or credit union, the dealership itself or a lending company that it owns provides you with the loan. There is no third-party involved in the process; it’s all handled by you and the dealership you go to.

With a BHPH loan, rather than shopping for a car and then seeing if you qualify for a loan to help you with it, you typically start with the financing process. There is usually no credit check involved with BHPH financing; rather, the dealership will only ask that you have a permanent living address, proof of employment, and income. Based on how much you make, they will approve you for a loan from them of a certain amount. With this knowledge, you can then shop the vehicles they have at the dealership that are less than or equal to your loan amount.

In other words, with a BHPH loan, you go through the car-buying process backward. The major perk of this entire process is the lack of a credit check – when you get Buy Here Pay Here financing, they don’t care about your credit history. All the dealership wants to know is that you make enough income each month to make your payments on the loan. So, if you have poor credit or no real credit history, you can still get a vehicle with a BHPH loan. The down payment on a vehicle from a BHPH dealer is also often much lower than with a traditional loan.

The downside with BHPH financing, however, is that you typically pay more in interest – often much more. Interest rates on BHPH loans can be two or three times higher than average loans from a bank or similar lender. You make your payments on a BHPH loan to the dealership, or their lending company, rather than a third-party. Some dealers require payments every week or every two weeks rather than monthly, and you might be required to make payments in person at the dealership.

A sales staff member is shaking the hands of smiling customers who just bought a car, after learning about buy here pay here vs traditional loans, at a buy here pay here dealership.

There is also a risk that you will pay more than a car is worth with a BHPH loan due to how high the interest on it can be. Plus, not all Buy Here Pay Here dealerships actually report your payments on a loan to a credit bureau, which means that paying such a loan on time might not help you build your credit. I admit, these are some pretty significant drawbacks. But they are often balanced out by the fact that a BHPH loan might be the last option available to someone that needs a car.

Buy Here Pay Here vs Traditional Loans

So, now that you understand exactly what’s involved with these kinds of loans let’s see how they compare a bit more directly. Keep in mind that some of these things are generalizations, but you should remember them whenever you consider your options. Both have their pros and cons:

Buy Here Pay Here – Pros:

  • No credit check required
  • Low down payment
  • Only work with the dealership for financing

Buy Here Pay Here – Cons:

  • High-interest rates
  • Potential to spend more than the car is worth
  • Not guaranteed to help build credit
  • Payment method can be a hassle

Traditional Loan – Pros:

  • Low interest
  • More freedom in the car-buying process
  • On-time payments help improve/build credit

Traditional Loans – Cons:

  • Credit check and approval required
  • Higher down payment
  • Have to deal with third-party for financing

The Last Word

So, at the end of the day, which option is better? Well, it really depends on your particular situation and the options that are available to you. If you have pretty good credit, or you’re not sure about your credit, then start off with a traditional loan and dealership and see if you can get qualified. In general, a traditional loan either at a dealership or through an online dealer will give you the best interest rate and most freedom in making a purchase.

On the other hand, if you don’t have the credit to qualify for a traditional loan, then a BHPH dealership can be a good choice. Just shop around to get the lowest interest rate you can find and make sure you understand all the terms and conditions before you sign. Pay particular attention to how long you have to make a late payment before they repossess the vehicle, and make sure they report on-time payments to a credit bureau to help your interest for next time.