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The Pros and Cons of Buy Here Pay Here

Businessman holding car keys in a dealership

There are pros and cons to just about every method of buying a car. Today, we will discuss the pros and cons of using a Buy Here Pay Here (or BHPH) dealership for finding and purchasing yourself a car. If you know anything about BHPH lots, you know that they should never be a car buyer’s first option. Major dealerships offer financing deals that are much more lucrative when it comes to interest rates and how that affects the final price than BHPH dealers. However, if you have really bad credit or no credit at all, many dealerships and banks won’t take the chance on financing your purchase. If you don’t have the money to buy a car that will suit your needs outright, and you can’t get a dealership or bank to finance your loan, there aren’t many choices left on the table to choose from.

A BHPH dealer can get you in a car right away, no matter what your credit report looks like, as long as you’re willing to overpay for the car by paying high-interest rates and stretching out the payment plan so that you end up paying for the car up until the point that it’s time to think about getting a new one. A BHPH dealer that reports the payment histories to the credit bureau is actually a way to repair or build your credit to a level where you may have more options the next time you’re in the market for a car. Just be careful, not every BHPH dealer reports to the credit bureau. So if you’re paying off a car and making timely payments in hopes of building or repairing your dismal credit score, you may be disappointed to find out that all your hard work and timely payments have done nothing for your credit score because the dealer you were going through doesn’t report to the credit bureau. Be sure to ask ahead of time and find a BHPH dealer that does report payment history to the credit bureau, as one of the main pros of BHPH financing is the opportunity to build or grow your credit score.

A great way to save money while using a BHPH loan is to trade in your old vehicle as a payment towards the new car you are trying to acquire. Many BHPH loans are small and not worth the hassle of setting them up, but usually, they save you a good bit of money when you look at the bigger picture. Imagine if you have an old gas guzzling mobile from the late 80’s, and you’re trading it in for a gas efficient economy car. Not only is the trade-in going to knock a chunk of change off of the amount that you owe on the new car, it’s going to save you tons of gas money and get rid of an old clunker in the process.

When looking for the right car at a BHPH dealer, you may want to mention being interested in a certified pre-owned vehicle. The price point on these cars may be a bit steeper than non-certified vehicles, but having a thoroughly inspected car instead of one that could fall apart as soon as you drive it off the lot, may save you lots of money down the road on maintenance and help to ensure that your investment stays on the road for as long as possible.

Another drawback to BHPH dealers is that many of them don’t offer warranties on their vehicles. Sometimes warranties are offered, but not on every vehicle on the lot as some are too old to cover. A used car without a warranty option should be a red flag for any potential car owner. A reputable dealer should offer warranties for the cars on the lot worth investing in. If no warranty is offered on the car you are interested in, you should think long and hard about whether or not it is the right car for you.

Another plus about buying from a BHPH lot is that many BHPH lots offer a 48-hour return option if you are not satisfied with the car you chose originally. So, you’ve been car shopping all day and you ended up at a BHPH dealer. You find a car that looks like the one for you, haggle the dealer about the price and finally arrive at a deal you can get behind. You sign along the dotted line and the dealer gives you the keys to your new ride. You pull out of the dealership and onto the street and all of a sudden the car starts to seize up. You try a few things, talking to your car, patting her gently, but the car is still not handling right and you realize you made a big mistake picking out the car that you chose.

With most dealers, you are stuck with your decision, that’s your car now and you have to deal with it, but with most BHPH lots, you have a 48-hour window to decide that the car is not right for you. Make sure you are dealing with a BHPH lot that offers the return window in case you find yourself in this situation after you make your decision. Many reputable BHPH dealers also offer a free CarFax report on the vehicles they sell. If you have bad credit, BHPH lots are much less of a time waster than the traditional dealership, who will spend hours showing you the car of your dreams only to let you down drastically when it’s time to see if they can help you finance the car. If you know you’re credit is shot, you may not want to waste your time at the traditional dealership only to come up disappointed. Sometimes, a BHPH lot is the only decision for a potential car buyer, and the purchasing process is a lot more realistic and hassle-free if you are aware of your financial position.

Update 4/11/19

Spend some time at any car dealership, and you’re likely to come across a wide range of customers. Some kicking tires, some ready to buy. Some first-time buyers, and some seasoned vets. Those in search of new model year offerings and those interested in gently-used vehicles. Looking to buy, or looking to lease. And (of course) some who are more financially ‘comfortable’ than others. But what if you count yourself among those who have less money to play with or those plagued by challenged credit which disqualifies you from traditional financing options? Well, that’s where Buy Here Pay Here dealerships come into play, and we’re going to explore them a little deeper for the benefit of those who may not be ‘in the know’.

Exploring Your Options

Regardless of what kind of buying position you’re in, it’s imperative that you understand your credit rating/FICA score, and the financing options available to you before you embark upon any vehicle purchase. While a certain segment of our population might be able to pay cash for a car, truck or SUV, most of us still need to secure financing. Whether obtained from our primary financial institution, another third-party lender, or the dealership themselves, it’s important to understand the terms of the loan. APR% is key to paying the least amount possible for any vehicle, and that will be decided by the lender based on your individual credit score. Not all lenders are created equal, though, so you should confirm what options (if any) are available to you before moving forward.

A couple is holding the keys to the car they bought at a buy here pay here dealer.

Going BHPH

The inability of the credit-challenged to qualify for financing might leave them without a means of buying a vehicle that they need. A Buy Here Pay Here dealership exists to help these customers. They do so by acting as the lending institution, self-financing the customer to help them buy one of the dealership’s vehicles. They determine an APR (higher, to offset the lending risk) and require the customer to make their payments directly to the dealership.

But the BHPH industry has been maligned by some of its less reputable players and (especially over the last decade, in the wake of the global depression) has incurred its fair share of criticism. Labeled as another kind of predatory lending thanks to its high APR’s and rapidly depreciating assets, many dealerships have been called to answer for questionable practices including (but not limited to) fine print that sets the customer up to fail and unjustified repossession of vehicles. So with that in mind, let’s dig into some of the facts and fiction related to BHPH dealers.

BELIEF: 

Customers of BHPH dealerships should expect interest rates of 30% or higher. 

In this article we’ll refer to ‘reputable dealers’ on several occasions. The simple truth is that BHPH dealers wouldn’t be saddled with a negative stereotype if there weren’t proven examples of dealerships engaged in less-reputable practices. That said, a recent survey shows the average APR at BHPH dealerships to fall in around the 20% mark. Considering that ‘Deep Subprime’ (FICA scores lower than 549) buyers might get approved for 17.9% from a third-party lender, it would appear that most BHPH dealerships are approving customers for reasonable terms. In fact, many dealerships continue to approve rates far below 20%, proving that there is still some genuine altruism in the BHPH industry.

BELIEF:

Dealerships will require a downpayment that offsets the price they had paid for the vehicle, making payment with interest an automatic revenue stream. 

This is an outdated criticism made nearly impossible by changes in the industry, from the dramatic increase in wholesale vehicle prices to the limited budget of the average BHPH dealership. This lingering criticism has plagued BHPH dealerships, almost as much as ignorance to ‘lemon laws’ have. Consumers need to acknowledge the high level of risk that a BHPH dealership exposes themselves to, combined with the expense of charging-off bad debt and the facilitation of vehicle repossessions. They might be surprised to learn that the majority of interest accrued by a BHPH dealership is used to offset those expenses.

BELIEF:

Do not expect warranty coverage or extended assistance from a BHPH dealer. If there is a warranty, it is likely to come with restrictive conditions and/or high deductibles. 

Considering that BHPH dealerships are almost exclusively dealing in pre-owned inventory, is it that hard to believe that a vehicle’s original warranty might have expired? Of course not, and therein lies an important distinction. Many BHPH dealerships offer a private warranty of some kind, and increased competition has made that an easy way for dealerships to set themselves apart. In addition, the idea that customers are likely to stop paying when the car stops running has prompted a greater likelihood of dealerships helping their customers. Self-interest is, after all, a great motivator. As for the terms of any warranty, not all are created equal, so the burden is placed upon the buyer to read the fine print and judge for themselves.

BELIEF:

Any late payments will result in repossession, additional charges, and termination of contract. 

In this regard, the average BHPH dealership is no less scrupulous than a traditional lending institution. Both consider a financing agreement to be a legally binding agreement, subject to reassessment if the lendee fails to meet the contractual repayment conditions. There is also no data supporting the suggestion that BHPH dealerships are more likely to repossess property than any other lender is, or that they do so with any greater frequency.

BELIEF: 

Fraudulent practices allow a BHPH dealership to “churn.”

What is churning? Within the context of a dealership, churning is when a disreputable BHPH finances a buyer in a manner that sets them up to fail. They are then able to repossess that vehicle and repeat the same cycle, re-selling the same vehicle repeatedly while profiting from downpayment and any monthly payments secured.

Is this true? Sadly, yes. There have been a number of dealerships found guilty of such inexcusable practices, but they are the exception and not the rule. The vast majority of BHPH dealerships understand the sensitivity and importance of the service that they provide. Many take a great deal of pride in providing that level of assistance. In addition, there is any number of regulations that exist to eliminate negative practices, which brings us to…

BELIEF:

There are no regulations on the BHPH automotive industry.

Check the books. There are countless state and federal laws designed to protect consumers and standardize the practices used by BHPH dealerships. From the State & Federal Unfair & Deceptive Practices laws to the Truth in Lending Act, the Risk-Based Pricing Rule to the Fair Debt Collections Practices Acts. Plenty of controls are in place, and more customers need to be aware of that, to help remove the black cloud from above the BHPH industry’s head.

So Why Did We Warn Against BHPH?

To be clear, we did no such thing. We simply encourage anyone to familiarize themselves with their credit standing and explore all the financing/buying options available to them. You might be surprised at your ability to find support from third-party lenders and traditional dealerships. And if that saves you a few percentage points, it could mean a lot more savings and a lot less stress.

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