Whenever I’m ready to start shopping for something, the first thing I do is search for it online – not necessarily to buy it right away, but just to do some research and look around. This is true whether I know exactly what I want, or if I need to do some digging before I pick just the right device, gadget, or vehicle. So if I’m sitting around and I want to buy a new car, but my credit isn’t great, I might search for something like “Buy Here Pay Here dealership,” and see what I can find.
That’s a great place to start, but if you do that, there are some things you really need to know before you go to a BHPH dealership. It’s not that these dealers are bad or shady; it’s just that the more you know, the better you can make a fully informed decision. Not only will this ensure you get just the right vehicle, but it can end up saving you a lot of money in the long run. Trust me, these things are better learned the easy way – the hard way is expensive.
Buy Here Pay Here Dealerships
Let’s start from the top: What are Buy Here Pay Here dealerships? Quite simply, they are dealerships that provide financing for you when you want to buy a new vehicle but cannot pay for the whole thing up front. This can be done in a number of ways, but usually, the dealership has a finance company that they also run, which is used to provide you with a loan for your new vehicle. Pretty straightforward, but the difference between going through a BHPH dealership and loan process compared to traditional bank financing can be pretty huge.
Bank Financing vs. BHPH Financing
In the past, the most common ways to buy a new car were to either pay for it up front with cash, or to get a loan from a bank or other third-party lending institution and then pay off that loan over a few years. With the advent of BHPH dealerships and other options, there are a lot of different ways to buy a new car, and it can all get pretty confusing.
The basic breakdown is this: whether you go through a bank or a BHPH dealership, you’re going to have a loan that you have to pay back, and there is interest involved. This interest is one of the biggest differences between bank and BHPH financing. In general, you’ll get a lower interest for your payments when borrowing from a bank or similar financing agency than through a BHPH dealership. In fact, the difference can be very substantial and make the overall long-term loan much higher when going through a BHPH dealership.
So why doesn’t everyone just stick with banks? Well, it all comes down to credit. People with good credit typically can go through banks and similar lenders who will give them a loan at a pretty low interest rate. Those of us with credit that’s not exactly spectacular can’t always use a bank. In general, if you’re considered a high-risk borrower, then you’re going to have high interest on your loan, whether it’s through a third-party or from a BHPH dealership.
Pros and Cons of BHPH Setups
There are some good reasons to go with a BHPH dealership, but also some drawbacks. Understanding all the factors at play can help you make a fully informed decision and ensure you don’t end up paying more for your new vehicle than you need to.
Pros: Advantages for going with a BHPH dealership include the fact that almost everyone can get financing for a vehicle. As long as you have an address and a steady job, you’re probably going to get approved. After all, these loans come from the dealership and they have some pretty good reasons to want to sell you a car. So for people with poor credit, a BHPH dealership might be the best bet for getting a new car or truck.
Cons: Spoiler alert: BHPH dealerships aren’t just handing out loans to people because they believe that everyone should have a new car. They’re doing it to make money. In fact, they can make more on the lifespan of the loan than on the actual sale of the car itself. The high interest rates on BHPH financing is probably the biggest drawback to them – it can often be in the double-digits and potentially double the overall cost of the vehicle.
You also might have to physically take a payment to the dealership where you got the financing, either every week or every two weeks. This can limit exactly what dealership you can reasonably go to since you’ll have to make these payments so often – though some Buy Here Pay Here dealers will let you pay online or over the phone. The process of buying a car from a BHPH dealer can also feel rather backward, since you begin with your financing options and then look at vehicles that fit your loan approval.
The good news is that car financing has become much broader than in the past, so you do have some other options. Of course, if your credit is pretty good, then financing through a traditional lending institution is probably your best bet. You can also pay upfront with cash for the full price of the vehicle and not have to worry about a loan – though most of us can’t pull that off for a new car or truck. Even if you do have the cash, in some cases it can be better to invest that money and get a loan with lower interest than your investment.
If you have a 401(k), then you may be able to use that to borrow from and finance your vehicle. There are some pretty big tax issues and risks with this kind of loan, however, so check with your 401(k) administrator before going this route. You can also use a home equity loan to borrow against the value of your house and use that to buy a new vehicle. The danger here, of course, is that your house becomes collateral, so if you end up having issues paying off your loan, then your home is in danger. That’s a pretty big roll of the dice.
The Final Analysis
So, what does all of this mean? Well, it means you have more options than ever before for buying a vehicle – new or used – and you should really explore your options before making a purchase. Even if you have poor credit and feel like you can’t possibly get approved for a loan to buy a vehicle, you might be surprised at what is available. Since BHPH dealerships have become more popular and proven that potentially risky loans are often worthwhile, more and more lending organizations have decided to work with people they view as high-risk borrowers.
At the end of the day, it comes down to this: you have options, but you don’t know what’s out there unless you look for it. Check out dealer websites, even if they don’t advertise as Buy Here Pay Here dealerships, and other online resources to see what’s available. You might find you have more choices than you realize when trying to figure out how to pay for a new vehicle.