As you’re browsing the many car selling sites and platforms, you might come across the term “buy here pay here” (BHPH), referring to some car dealerships. It’s a term meant to encompass a simple and accessible form of car buying, but many shoppers don’t fully understand the difference between BHPH lots and other dealerships.
Below, we’ll look at how BHPH operations work and their pros and cons. Let’s start with a clear definition of what is a BHPH dealer.
What is a Buy Here Pay Here Car Dealer
In simple terms, buy here pay here car lots are a kind of dealership that handles the sale and financing of cars for customers through in-house resources. This is in contrast to the many other dealerships that rely on third-party funding. BHPH dealers first emerged in the 1970s in the wake of the savings and loan crisis as more people struggled to get credit. It was a forerunner to the financial crisis of 2008.
With unemployment on the rise and credit becoming increasingly hard to obtain, car dealerships faced a difficult situation. Their industry relies on credit since most people don’t have the kind of money necessary to outright buy a new car. What’s more, the price of cars was also rising as they became more sophisticated—a trend that continues today.
With many potential customers dropping out of contention as outside finance companies refused to support their purchases, car dealerships lost business. This gave rise to the so-called buy here pay here (BHPH) car lots, where customers with poor credit could get an in-house loan approved by the dealerships. But how could this work? Can a car dealership afford to run its business this way?
How Do Buy Here Pay Here Car Lots Work?
As the name suggests, the basic idea behind BHPH lots is that a customer chooses a car from the lot and then has their financing approved solely by the dealer, not an outside finance company. This not only speeds up the process but allows the car dealership more power and control over the success of each transaction. If the dealership is willing to lend, they are no longer constrained by the customer’s credit score nor the requirements of outside lenders.
Besides the financing source, the other big difference between a BHPH dealership and a regular one is the loan’s interest rate, with the former usually offering higher interest rates. Basically, the BHPH lot knows some customers can’t get credit elsewhere and thus charge more. At least, that’s one way of looking at the situation. On the other side, a lower-than-ideal credit score presents a higher financial risk for the lender, hence higher interest rates. It’s the same with virtually any kind of subprime lending model.
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Pros and Cons of Buy Here Pay Here Car Lots
Some advise poor-credit customers to stay away from BHPH dealers due to the high interest rates. But, like with most things financially related, there are pros and cons. Let’s explore both sides of the BHPH coin.
1. Car Financing for Those with Poor Credit
A poor credit score doesn’t always mean an inability to afford a vehicle. There are many reasons for poor credit, even for those who are “cash-rich.” For instance, people who have lived overseas for long periods and returned to the U.S. may have a low credit score. Also, people who may have had a short-term period of financial hardship may have seen their scores take a beating but are now getting back on the right track.
Whatever the circumstances, countless people need the opportunity to get credit and build a successful repayment history to get back in the good graces of mainstream lenders. But major banks and finance companies are faceless entities that rely on computer algorithms. BHPH dealers add a human touch to the car lending process that can apply greater flexibility in the decision process. The seemingly simple act of being approved for an auto loan by a BHPH car lot could be just the shot in the arm that someone’s financial life needs.
2. Streamlined, Simplified Process
Buying at a BHPH dealer is simplified as all the decisions are made in-house, including financing. A buyer can walk in with a car in mind and drive off the lot the same day. If you’re in a hurry to get a car and can’t wait for a regular dealership to get all the paperwork done, then a BHPH dealership is a good solution.
The only way to get similar fast acceptance at a traditional car dealership is to have an excellent credit score that the computer-based algorithm can respond to almost immediately with approval. A poor credit score adds more time to the process and a greater likelihood of not being approved.
3. Small Down Payments are Typical
Another advantage of a BHPH lot is that they typically require a small down payment, perhaps as low as $1,000 or $500. And in some situations, a down payment may not even be needed. A small down payment is vital for buyers who can handle the monthly payment but may not have a large lump sum on hand.
1. High Interest Rates
High interest rates are part of the BHPH loan process because lower credit scores represent a higher risk for the lender. As many of these dealers are independent businesses, the risk is leveraged by the greater loan costs absorbed by the borrower. Experian reveals that the average interest rate offered by independent dealers to those with low credit scores ranges from 18.75 to 20.76 percent. Some dealers may charge as much as 25 percent. Even a mediocre score of 601-660 will result in a typical 13.08 percent interest rate.
Since many BHPH dealerships are lending to those with scores of 300-500, then a rate of 20 percent interest is not unusual. Compared to the rate of just 4.88 percent given to those with credit scores of 781-850, these are loans that would go through traditional lenders like Toyota Financial Services , other manufacturer-supported lenders, or banks.
Some states have maximum interest rates, which helps somewhat. In New York, for instance, the maximum is 16 percent, and in Florida and Texas, it’s 18 percent. Michigan allows up to 25 percent, a gift to some lenders but far from ideal for consumers.
2. Greater Risk of Loan Going “Underwater”
In the world of auto finance, going “underwater” is the same as negative equity in your home. It means that the amount you still have to repay on the car exceeds its actual market value. This is far more likely when purchasing from a BHPH dealer because of the twin factors of high interest rates and low down payments.
With a typical car loan, a buyer might put down 20 percent of the sale price and then make repayments that keep them ahead of the depreciation curve. That’s harder to achieve for poor-credit buyers buying through BHPH dealers.
3. May Come with Added Conditions
Most BHPH dealers use a remote vehicle immobilizer or tracking device to control or monitor a BHPH-financed vehicle. Miss a payment, even by a day, and you may not be able to drive. That means that even a simple oversight like forgetting to make a loan payment can put a borrower in a stressful situation.
A BHPH dealer may also require a weekly or bi-weekly payment schedule. The idea here is that it’s easier for a borrower to come up with more frequent but smaller amounts. This approach also alerts the dealer sooner if there’s trouble keeping up with the loan.
Conclusion: On Balance, Are Buy Here Pay Here Lots A Good Choice?
For the right buyers, there are clear advantages to using BHPH lots. These dealers offer a pathway to car ownership and credit building that would otherwise be unavailable. But as with any other service aimed at those with bad credit, there are more terms and conditions (and higher costs). So, it’s crucial for a buyer to thoroughly understand what they’re getting involved in.
Read all the paperwork and ask lots of questions. If needed, have a lawyer review the contract and loan agreement. Taking these precautions ahead of time can help a buyer steer clear of bad actors in the marketplace and make the process simple and stress-free.