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Buy Here, Pay Here: What You Need to Know

Quick Facts About Buy Here Pay Here Car Loans

The shaky economy is leading to higher interest rates and tighter credit. That is, at least for now.

In other words, getting a car loan right now may be tough for many consumers. As banks and credit unions grow more selective in approving new borrowers, you may find yourself looking for alternative financing solutions. One such solution is Buy Here Pay Here (BHPH) car dealers. They’re sometimes called “Tote Your Note” or “Bad Credit No Credit” car dealers.

BHPH dealers shouldn’t be your first choice for buying and financing a car. However, they perform a service for borrowers who can’t secure a traditional loan. You won’t be driving a top-tier vehicle, nor will you get a bargain interest rate. However, BHPH dealers specialize in making loans to borrowers unable to get financed anywhere else.

As you read along, we’ll explain BHPH, how it works, when it might be right for you, and how a BHPH loan could affect your credit.

What Is a Buy Here Pay Here Car Lot?

In the simplest terms, a BHPH car lot is one that not only sells cars but also finances the purchase. That is, it doesn’t just arrange the loan; it also underwrites the loan with its own money. Consequently, the dealer, rather than a bank or some other traditional lender, approves or rejects the loan application. A BHPH dealer is even more motivated to put you in a car because the dealer makes all the money. Not only does the dealer make money from selling the vehicle but also from underwriting the loan in the form of interest.

Even on the rare occasion when the dealer performs a cursory credit check, it won’t matter much. You see, approval depends more on how badly the dealer wants to sell the car than on a borrower’s credit score and history. Often proof of employment and residence is enough to earn approval.

If you search hard enough, you may find a traditional car dealer that offers BHPH on its used car lot. It may not advertise as such. However, phrases like “We Finance” or “Rebuild Your Credit” on signs or written across the windshields of some of its inventory might indicate that it underwrites some of its own financing.

RELATED: Car Financing Glossary: Finance Terminology Explained

How Does Buy Here Pay Here Work?

A few significant differences exist between the experience at a BHPH dealer and a traditional dealer. When you shop a BHPH lot, be prepared to answer some qualifying questions upfront. For example, you may need to provide proof of employment and residency upfront and furnish the amount of the down payment you will make. The salesperson will then show you the cars on the lot for which you qualify.

Unlike a traditional third-party loan where you make your payments to a bank, credit union, or finance company, you’ll make the BHPH loan payments directly to the dealership. Rather than monthly payments, you may find yourself committed to making payments every two weeks or even weekly.

With BHPH, you will almost certainly pay a much higher interest rate than with a traditional lender. Most states cap a BHPH dealership’s interest rate at around 29%. You probably won’t be paying that much but paying an interest rate of 20% or more isn’t unheard of.

BHPH dealerships are usually much quicker to repossess a vehicle than traditional lenders. One reason why many BHPH loans demand more frequent payments is to stay on top of the buyer. In other words, to give the dealer a jump on a borrower who misses a payment. Even if it’s weekly, missing one contractual payment is sufficient for a dealer to repossess a vehicle.

Tip: Before signing anything, determine what the dealer’s policy is on late payments and ensure it’s stated in the loan agreement.

When Do I Need Buy Here Pay Here Financing?

Our advice is to only go to a BHPH dealer once you’ve exhausted every other legitimate lending avenue. It’s not that BHPH is necessarily bad. However, unless you have no other choice, there is no reason to pay the inflated BHPH interest rates. On the other hand, if your credit score is below 500 and you have a spotty credit history, BHPH may be your best last resort.

Tip: Find a BHPH dealer that reports to the credit bureau if you can. Many of them don’t, but some of the dealerships do. You should at least get recognition for making your payments on time because it will help rebuild your credit.

How Buy Here Pay Here Affects Your Credit

Your credit is not damaged simply because you finance a car at a BHPH lot. Often it’s a credit black hole because no one outside of the dealership is aware of the loan. Moreover, the reason you are financing through a BHPH dealer is that your credit is already weak. The damage to your credit was already done before you walked onto the lot. However, if you do business with a BHPH dealer that reports to the credit bureau, making the payments on time can help rehabilitate your credit. As with any loan or revolving credit account, keeping up with your payments improves your credit.

On the other hand, even BHPH dealers who don’t routinely report positive activity to the credit bureaus will often report repossessions. That is to say, if you miss enough payments (and it may only take one) for the dealer to repossess your vehicle, it may show up as a negative mark on your credit report.

RELATED: Can You Buy a Car With a Credit Card?

Pros of Buy Here Pay Here

Here are a few reasons for using BHPH:

  • The approval process is relatively quick; consequently, you can drive away the same day.
  • All you usually need to be approved is proof of employment and residence.
  • Depending on the strength of your income, you may score a surprisingly low down payment.
  • If the dealer reports to the credit bureau, you can build up your credit score with on-time payments.

Cons of Buy Here Pay Here

Here are the reasons for not using BHPH unless you must:

  • Punishingly high-interest rates.
  • Older, lower-quality used vehicles.
  • The dealer determines from which vehicles you may choose.
  • You may have to make payments every other week or even weekly.
  • Often, there is less wiggle room for late payments. In other words, there’s a greater risk of repossession.

RELATED: Buying a Car with Cash: Everything You Need to Know

What Are the Buy Here Pay Here Alternatives?

The truth is, there really aren’t any alternatives to BHPH. It’s basically the end of the line in terms of available avenues for securing a car loan. If you find yourself on a BHPH lot, it should be because you’ve exhausted all other financing possibilities.

What Is a Co-signer for a Car Loan?

The one possibility you may not have considered or explored is a co-signer. This is a relative or friend with solid credit who is listed on the loan as the responsible party if you fail to fulfill the payment schedule. Generally, we discourage the idea of a co-signer, particularly for the co-signing party. It’s a role with nothing but downsides. However, as the borrower, it may be the only lifeline for securing a loan.

Both the borrower and co-signer must have a credit check. The lender must be convinced that the co-signer can afford to make the payments. At some point, if the borrower misses a payment or two, the lender will look to the co-signer to pick up the slack.

The bottom line for the borrower: Often, a co-signer is all it takes to qualify for that hard-to-get car loan, and it’s an opportunity to rebuild credit if the payments are made on time.

Tip: For the most part, we discourage anyone from co-signing a car loan for someone else. There is no upside. It can negatively affect your credit score. Moreover, even if you wind up making the payments and paying off the loan, the car is not yours. It remains the property of the borrower.

What Is Lease Here Pay Here?

Although it doesn’t enjoy the same awareness or popularity as BHPH, Lease Here Pay Here (LHPH) is another strategy for higher-risk borrowers. Dealers like it because it allows them to rake in more profit. On the other hand, it’s a handy, albeit expensive, tool for consumers with weak credit to lease and solve their short-term transportation needs.

We won’t worry here about how it translates into more profits for the dealer. Who cares, right? However, for the consumer, it can mean a better-quality car than might be available with a BHPH loan, as well as a flexible lease term. At the heart of it, the car remains firmly under the ownership of the dealer. In other words, at the end of the lease, the lessee doesn’t own the car. The lessee, in fact, rents the car.

The advantages for the consumer are a somewhat better car and a lower monthly payment than the same car with a BHPH loan. However, our advice is, if you find yourself on a BHPH lot, go with buying rather than leasing.

Tip: In most cases, we aren’t fans of leasing, even for the average consumer with solid credit. There are advantages like getting more car for your buck. However, particularly for the consumer struggling to meet a budget, paying on something for months or years without eventually owning it simply doesn’t make long-term financial sense.

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Editor’s Note: This article has been updated since it was originally published.


Does buy here pay here affect my credit score?

Yes and no. On its own, getting a BHPH loan almost never has any effect whatsoever on your credit. However, it could have a positive effect if the BHPH dealer reports all loan activity to the credit bureau and you make your payments on time. Most BHPH dealers don’t make regular reports to the credit bureau. A BHPH loan can have a negative effect on your credit report if you fail to make the scheduled payments and the dealer repossesses the vehicle. Even dealers who don’t regularly report to the credit bureau will often make an exception and report a repossession.

Are buy here pay here dealerships scams?

As with any business model, there are always bad apples but in general, no, BHPH dealerships aren’t scams. Borrowers paying 20% or more in loan interest may often feel they’ve been scammed. However, lenders (any lenders) base the interest rate on the risk the borrower can’t for won’t fulfill the terms of the loan. The lower a borrower’s credit score, the higher the interest rate.

Can you trade in a buy here pay here car?

Yes. Whether you have paid off the BHPH loan and have the title or are still making payments, you may trade in the car. As with a conventional car loan, any unpaid balance must be satisfied with the BHPH dealer (This includes any prepay penalties that might be in the BHPH loan contract). Otherwise, the trade-in process is the same.

Russ Heaps
Russ Heaps
Russ Heaps is an author specializing in automotive, financial and travel news. For nearly 35 years he has covered the automotive industry for newspapers, magazines and internet websites. His resume includes The Palm Beach Post, Miami Herald, The Washington Times and numerous other daily newspapers through syndication. He edited Auto World magazine, and helped create and edit NOPI Street... Read More about Russ Heaps

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