The situation is hardly an enviable one.
Imagine that you are in need of a vehicle. Maybe this is your first car purchase, or possibly the first one you’ve purchased in a while. Perhaps the vehicle that you’ve been driving has met its demise. Whatever the reason, you are without a vehicle with an urgent need to do something about it.
While many car buyers are able to secure the financing they require, you are not. Whether it is the result of possessing bad credit, or no credit whatsoever, your bank is unwilling to finance you. You have been equally unsuccessful with credit unions, and auto financing groups. Even the dealership has been unable to help due to the hesitation of their own financing partners.
What options are you left with? For many Americans, the only remaining chance to get the vehicle they need rests with…
The premise is simple:
Rather than secure traditional third party financing, the dealer steps in as the lender. Based on the merit of the customer’s finances, the dealer determines which vehicle(s) in their inventory the customer is eligible to purchase. To offset the risk, the financing is offered at a higher APR than would normally be found from traditional lenders. Should the sale go through, the customer will make payments directly to the dealer (on a bi-weekly or monthly basis).
Acknowledging the Stigma
While BHPH dealers are a viable alternative for many consumers, this particular branch of automotive sales has faced harsh criticism and endured widely-publicized legal battles. The reason behind both burdens are what many believe is a flawed business model.
From the perspective of detractors, BHPH dealerships bait customers who are not financially-equipped for the expense of a financed vehicle. The risk to the customer is then increased by the higher percentage interest rate. Should they fall behind on payments, the vehicle can be repossessed and placed back on the lot for sale, possibly to another ill-prepared customer. And thus the cycle repeats.
Rebutting the Stigma
While we have no interest in defending the practices employed by disreputable dealers, we also have no interest in passing judgment on these dealerships as a whole. Let’s focus on the oft-criticized business model.
The primary clientele for these dealerships are those who have no means of securing financing, based on their poor (or complete lack of) credit history. Whether that credit history is the result of unexpected household emergencies, poorly-managed finances or negligence is beside the point. Traditional lenders have identified the customer as high-risk.
Enter the BHPH dealership, willing to finance the customer, albeit at a higher interest rate to offset the perceived risk. Call it what you want, it’s no different than the practices of any other lending institution. Keep in mind that a reputable dealership (of which there are many) will perform their due-diligence, in reviewing the customer’s finances in order to determine which vehicles they are eligible to purchase. That customer is fully aware of the interest rate, and the monthly (or bi-monthly) payment amount before they drive off the lot. Any misrepresentation on the customer’s part, financial ill-preparedness, or fiscal mismanagement that occurs down the line falls on the customer’s shoulders, not the dealer’s.
BHPH and the Media
At some point or another, most of us have read or watched an expose on dealerships that employ more dubious practices. And while customer experiences with these more scrupulous dealers expose legitimate flaws in those practices, some ordeals that receive media attention are simply sob-stories. Why? Because a car is a luxury item.
If I turn on my TV and see a story about a struggling family, with young children, whose utilities were turned off due to genuine inability to pay, I would absolutely participate in the outrage. Why? Because I believe that water, heat, and electricity should be among basic entitlements of existence in modern society.
If I were to see an expose on someone suffering from illness, crippled by medical debt and unable to afford the overpriced medication required to keep them alive, I would be the first to cry foul. Why? Because there is no entitlement more basic than life itself.
But (and feel free to call me heartless) I feel little sympathy for anyone who misrepresents their financial viability in order to secure a luxury item. I have no appreciation of the struggle faced by someone who would knowingly put their family’s security at risk, in order to obtain a luxury item. And I feel no outrage at the repossession of any luxury item, due to a person’s inability (or lack of willingness) to pay the amount which they had agreed to pay, within the terms they had agreed to pay it.
Know the Difference
But I refuse to believe that all customers are negligent, fiscally-irresponsible leeches. Having grown up in a struggling single-parent household, I know the burden of food stamps and welfare better than most. Stereotypes may usually have a basis in reality, but they never are indicative of any group as a whole.
The same open-mindedness should apply to BHPH dealerships. While some may certainly employ manipulative practices in order to line their own pockets, some are simply businesses that are looking to move units just as any business does.
With an expectation of good business practices, there should be as much burden placed on the consumer. Before purchasing a luxury item, they should (i) understand their finances (ii) understand the effect that their timing has on their finances (iii) verify the legitimacy of the BHPH dealership that they are partnering with and (iv) understand the terms of the contract, entering into it only if they are able to adhere to it.
A “Necessary” Luxury
A car may be a luxury item, but life is so much easier with one. For those who are overlooked by traditional lenders there are over 33,000 Buy Here Pay Here Dealerships in the U.S. right now. If you fall into this category, you are not alone, over 2.4 million cars were sold by those dealerships last year. Keeping in mind that 1 in 4 customers default on their loans, you should have all the incentive you need to make sure that you fall into the majority of Buy Here Pay Here customers who don’t.