When people are looking to buy a car and find that every available credit avenue is shut, a Buy Here Pay Here (BHPH) option offered by car dealers usually ends up being their last, only and perhaps the best resort.
Outside of society’s elites, most people in the world don’t have the financial ability to buy a car with upfront cash payments. Usually, car buyers avail the services of third party lenders such as credit unions, banks etc., and borrow money to pay for their car. For a multitude of reasons such as an abysmal credit score and an unfavourable credit history, some people might not be able to avail the services of the traditional third party lenders. A Buy Here Pay Here (BHPH) dealer can step in and help in such scenarios.
What is Buy Here Pay Here?
Buy Here Pay Here is a form of financing service offered by a car dealership where a customer receives the car loan and makes out all the future payments at the car dealership itself. It can be construed as a one-stop solution for all of a customer’s car financing needs as the car dealership doubles up as the financial company. In general, Buy Here Pay Here refers to dealers of used cars that finance the vehicles that they sell, generally to buyers with bad credit history.
The decision to grant a Buy Here Pay Here loan is solely made by the car dealership and a dealership wants to move as many cars as possible, so the approval of a financial assistance is almost guaranteed, regardless of the customer’s credit history. All a customer needs to have, is an address and a steady income.
However, potential car buyers shouldn’t see Buy Here Pay Here as some kind of charity, ‘a car dealership’s initiative to get everyone wheels’ of sorts. This scheme is not born out of kindness and philanthropy. When car dealerships grant loan to customers, they tend to do so in order to make some profit on the financing scheme as well. For high risk borrowers (the usual clientele for BHPH), the interest rates tend to be really high.
Buy Here Pay Here schemes usually require car buyers to make their payments in person at the dealership, so finding a dealer close to home or workspace is really helpful. Some dealers might accept online transactions or payments via mail, but in most cases, the buyers need to make weekly trips to the dealership in order to make the payment.
Buy Here Pay Here dealerships usually deal with high mileage, old cars. Their entire clientele usually consists of people with no and bad credit histories. Their advertisements usually contain lines such as ‘No credit, No problem’ and ‘No credit check auto loans’. Buy Here Pay Here dealers can also offer to sell cars without any down payment or with down payments lower than $500. However, some dealerships can charge a down payment which is high enough to cover the purchase price of the vehicle that they are selling.
Drawbacks of Buy Here Pay Here
When car buyers apply for a loan to a third party lender like a bank or a credit union, the loan amount dispersed is restricted by the cost of the vehicle. However, a Buy Here Pay Here dealership might finance the vehicle for far more than its original value. Warranties, if any, carry ridiculously high deductibles. Since most Buy Here Pay Here dealerships sell cars to people with bad credit history, predictably, the cash flow becomes a struggle. Far more Buy Here Pay Here dealerships go out of business than traditional dealerships. The tight repayment schedules lead to cash constraints and financial failures.
From a buyer’s perspective, timely payment of a Buy Here Pay Here loan doesn’t reflect in the credit score. Buy Here Pay Here dealerships tend to not report payments to the credit bureaus. So unlike timely payments to bank loans, which enhances credit score, Buy Here Pay Here repayments don’t have much impact on credit scores. Since lending money to buyers with a poor credit history is a big financial risk, car dealerships may even install a tracking device or an immobilizer in the car in order to repossess it from the buyer in the case of missed payments.
To avoid Buy Here Pay Here schemes and their pitfalls, potential car buyers should work towards enhancing their credit scores, especially if they are recovering from bankruptcy. Saving enough money to at least generate the down payment for a third party lender is also a good idea. If a car buyer had no option but to avail the Buy Here Pay Here option in the first place, refinancing of the car may be possible if the credit score improves. Getting a co-signer with a good credit score is another good alternative to settling for a Buy Here Pay Here scheme.