A car loan application for buy here pay here financing

Is Buy Here, Pay Here Right For You?

Hundreds of thousands of vehicles are sold every year in the United States. More than twice as many used and pre-owned cars are sold as brand new ones. While some dealerships offer both new and pre-owned vehicles, many of the cars, trucks, and SUVs purchased every year come from what is known as a “buy here, pay here car dealership. These are usually mom and pop type outfits with no direct affiliation to a particular automaker. They may offer as many Toyotas or Hondas as they do Chevrolets or Fords.

Shopping for a new vehicle at these types of businesses has both its advantages and disadvantages. For one, you are not forced into a certain make or model. You are free to browse vehicles of all shapes and sizes from all over the world. You can often find an American SUV within a few feet of an Asian sedan. You won’t often find that kind of worldwide flavor at a dealership that specializes in one automaker.

However, the primary appeal of “buy here, pay here” dealerships is the financial aspect. These dealerships are much more amenable to working with those who have bad credit or no credit. As the name implies, you can finance directly with the dealership itself, rather than having to go through a bank or other third party lender. Many people prefer this process, as you get to work directly with the people who sell you a car. This may also work in your favor if you have a personal relationship with someone at the dealership.

The simple fact that you may know your salesman or financier at the local “buy here, pay here” dealership is something many people can appreciate. They would rather give their business to the little guy down the road than the mega-dealership on the highway. They would rather see the guy from their church or barber shop than a guy in a suit at the mega-dealership that may not be there when you go in for a routine check-up. They like the consistency of small business.

These place will often advertise that you don’t have to go through the arduous process of a credit check to get a car loan. As anyone with bad credit can attest, that can be an embarrassing few minutes. Their “no credit, no problem” approach to selling cars really speaks to those wishing to avoid that process.

Additionally, these places have a much lower required down payment, if they have a down payment required at all. It can be as little as a few hundred dollars. This lack of down payment is an enticement for those with struggling credit to be able to make a timely first payment (or even a second and third, depending on the size of the sticker on the car). When looking to improve credit, any time you can look a month or two down the road and see a way to save a significant amount of money is a definite plus.

These places have clear appeal to many prospective car buyers. However, as with any major investment or purchase, there are also negative aspects. When dealing with a “buy here, pay here” business, the interest rates will invariably be higher. They don’t have to compete with banks or credit unions and therefore can afford to charge a higher interest rate. They are only competing with similar businesses, who are doing the exact same thing.

That isn’t to say that these small dealerships are charging exorbitant rates just because they can. For one, there are laws against that very thing. For another, most of these small dealerships are outfits that rely on repeat business and word of mouth to succeed. They are not going to rob their core customer base blind. They are just doing what they have to do to stay in business.

However, these higher interest rates will have a long-term impact on your purchase. You may end up paying a significant amount more than what the car may actually be worth. By being forced to take this kind of financing, you could end up making an investment that is not financially sound, but you have to do it because you have no other option. Banks have no financial benefit of lending more than the amount of a purchase. It will not see any return on that investment, so banks and credit unions set limits on the amount it loans for purchases like a car or house.

When a “buy here, pay here” place acts as its own financial institution, it will see every bit of the money it pays out. They may finance a $15,000 car for $20,000. In the long run, they will see every dime of that $20,000 they finance to you. Again, this is not necessarily unscrupulous business. It is just the smaller place trying to keep pace with the bigger dealerships.

Speaking of larger dealerships, they are under obligation with the automakers with which they are affiliated to keep accurate records of all of their transactions. Big automakers like Ford and Chevy spend tens of millions of dollars every year in researching their customer bases. This includes knowing how their existing customers are keeping up with payments, maintenance and the like.

To that end, the large dealerships are required to report any made or missed payments to credit agencies. It keeps their records intact while informing the credit agencies of your activity. This practice pays off by being able to offer certain deals and services in certain areas of the country. Their return on that investment is exponential. “Buy here, pay here” outfits are not under the same financial obligation.

They do not spend that money on research and get no return on any investment other than your car payment and local advertising. What that means is that even if you are prompt with every car payment for the entire length of your car note, if the smaller dealerships do not report it properly, it will have absolutely no positive impact on the credit you have been working so hard to build up. Again, this is not a guaranteed practice among “buy here, pay here” dealerships, although it has been known to happen.

A young couple signs the paper work for their buy here pay here car loan

Buy Here, Pay Here – A Great Option For Those In Need (As long as you do your research!)

We know that having bad credit or no credit and needing a new vehicle is a very frustrating place to be in. We don’t all have that rich uncle that will swoop in and save the day at the end of the movie. Some of us have to work hard, budget carefully and spend wisely in order to get back to where we need to be. It is a long, difficult process and it seems like there is no end in sight sometimes.

Fortunately, there are some dealerships who are willing to help us, poor souls, out. They offer a lifeline where a bank or large dealership simply will not. They give us a chance to prove ourselves and make a positive change in our financial future.

However, we all need to be diligent about what we are getting into with “buy here, pay here” dealerships. There are other options, such as online financing, that provide further ways to get a new car. Do your homework and be careful what you are agreeing to before you seal your financial fate.