As you’re browsing the many car selling sites and platforms, you might come across the term “buy here pay here” referring to some car dealerships. It’s clearly a term meant to encompass a simple and accessible form of car buying, but many still don’t fully understand the difference between these buy here pay here (BHPH) lots and others.
Below, we’ll be taking a closer look at BHPH lots, what they are, how they work and the various pros and cons associated with them. Let’s start with a clear definition as to what BHPH lots are.
What are Buy Here Pay Here Car Lots?
In simple terms, buy here pay here car lots are a kind of dealership that handles the sale and financing of cars for customers totally in-house. Whereas many dealerships would look to outside finance provision, the BHPH lots don’t have to. They first emerged in the 1970s in the wake of the unfolding savings and loan crisis where growing numbers of people were struggling to get credit. The situation for many people back then wasn’t unlike 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 relied on credit since the majority of people didn’t have the kind of money necessary to buy a new car outright. What’s more, the price of cars was also rising as they became more sophisticated --- a trend that continues to this day.
With many potential customers dropping out of contention as outside finance companies refused to finance their purchases, car dealerships were losing a lot of business. This gave rise to the so-called buy here pay here (BHPH) car lots where customers with apparently poor credit history could get an in-house loan approved by the dealerships themselves. This kept car sales high, but how could this work? Can a regular car dealership afford to run on subprime finance in 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 can choose a car they want on the lot and then have their finance approved (or not) entirely by the lot and not by 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 can, and they are no longer constrained by the credit score of the particular customer nor the requirements of outside lenders.
Besides the source of the finance contract, the other big difference between a BHPH dealership and a regular dealership is the interest rate, with the former having typically higher interest rates. Basically, the buy here pay here car lot knows that you can’t get credit elsewhere, and thus the offering is less than ideal. At least, that’s one way of looking at the situation. On the other side, a lower-than-ideal credit score does also present a higher financial risk for the lender, hence higher interest rates. It’s the same with virtually any kind of subprime lending model.
Pros and Cons of Buy Here Pay Here Car Lots
There are some who are quick to say that these dealerships are bad for people and advise people to stay away, but like anything to do with financing and credit, there are pros and cons to this type of service. In this section, we’ll take a look at the two sides of the BHPH coin.
1. Car Financing for Those with Poor Credit
A poor credit score doesn’t always mean that you can’t afford a vehicle. There are so many reasons that you might temporarily have poor credit, even if you’re fairly “cash rich.” For instance, people who have lived overseas for long periods of time and returned to the US may have a lower 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 just need the opportunity to get credit and successfully stick to repayments in order to rebuild their credit and get back into the good books of those more mainstream lenders. The sad thing is that major lenders use a rather humorless, faceless computer algorithm to approve or reject applications for financing. BHPH adds more of a human touch that can review circumstances in a more sympathetic manner.
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; the first critical step to being pre-approved for credit cards, better deals on mortgages, and more.
2. Streamlined, Simplified Process
Since all the decisions can be made in-house, including the financing part, the entire car buying process is simplified and made more efficient. It’s actually quite possible to walk in with a car in mind and then drive off the lot on the same day. If you’re in a hurry to get a car and can’t wait for the regular dealership to get all their paperwork done, then a BHPH dealership is a good solution.
The only way to get similar fast approval in a traditional car dealership is to have the best-possible credit scores that the computer-based algorithm can respond to almost immediately with approval. If you have a poor credit score, then this process can take a very long time, and through all that waiting time the odds are that you won’t get approval. It’s unfortunate that people tend to think that no news is good news when it comes to car financing, but this is rarely the case. They can just be really slow, even when dealing with cases they may see as “easy rejections.”
Small Down Payments are Typical
One more great advantage of a buy here pay here lot is that they typically offer either a very small down payment option, or sometimes even no down payment is required. A down payment of just $500 is not unusual when buying at a BHPH lot, which is great for those who can afford monthly payments but may not have a big lump sum in the bank to use as a deposit.
Next, let’s look at the downside of using BHPH dealerships:
1. High Interest Rates
Earlier in our blog we mentioned that BHPH loans usually come with higher interest rates because the subprime credit score presents a higher risk to the lender. Many BHPH lots are independent car dealers, and Experian data reveals that the average interest rate offered by independent dealers to those with low credit scores ranges from 18.75 to 20.76 percent. Even a middling score of 601-660 will result in about 13.08 percent interest on average.
Since many BHPH dealerships are lending to those with scores of 300-500, then a rate of 20 percent interest is not unusual. Compare that to the rate of just 4.88 percent given to those with credit scores of 781-850. 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, which is a gift to some lenders, but far from ideal for consumers.
High interest means that ultimately you’ll be paying a lot more for this car than other buyers would, and that brings us to the second disadvantage.
2. Higher 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 BHPH dealers because of the twin factors of high interest rates and low deposits.
Under normal circumstances, a buyer might put down 20 percent of the sale price as a deposit, and then make repayments that keep them ahead of the depreciation curve. That’s harder to achieve for those poor-credit buyers who are looking at BHPH dealers.
3. May Come with Added Conditions
One of the less dignified drawbacks of buying from a BHPH dealer is that you may have to be subjected to having tracking devices installed on the vehicle that monitor your driving and can even immobilize the car remotely if you miss a payment for any reason. This can add pressure to your repayment schedule, and means you can’t even be out by a single day. Imagine having the money but you missed the payment because you forgot to do a transfer or update your online banking settings. It could further damage your credit, and leave you without a car when you need it most.
Conclusion: On Balance, Are Buy Here Pay Here Lots A Good Choice?
On balance, there are clear advantages to using BHPH lots. They offer those with no recourse a pathway to car ownership and credit building. Like any other service aimed at those with bad credit, however, there are more likely to be added terms and conditions, so buyers should be wary and carefully read every bit of paperwork they are given.
If they are at all unsure about the conditions, they should have the dealer explain them in simple terms and/or have a lawyer look at any contract for any outstanding or unusual conditions that one needs to know.
If one uses the services in the right way, and steers clear of bad actors in the marketplace, then they can have a very positive experience with BHPH dealers.