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The Pitfalls of Buy Here, Pay Here Auto Loans
“Buy here, pay here” auto loans offer borrowers convenience, swift loan processing and easy eligibility requirements; however, there are several significant downsides to this loan model that borrowers need to be aware of before signing up. To help you decide how to finance your new vehicle, we’ve outlined the way buy here, pay here loans work, their pitfalls and other auto loan options to consider.
“Have bad credit or no credit? Buy a car with us and pay right here!” If you’re in the market for a new set of wheels and don’t have the best credit score, a buy here, pay here loan can sound enticing. You’ll choose your new car and finance it all in one convenient location! Unfortunately, though, the buy here, pay here model can have significant pitfalls that can surprise borrowers.
To help you decide whether it’s worthwhile to go with this type of dealership loan, we’ve outlined the way this loan model works, its potential pitfalls and possible loan alternatives to consider.
What is a Buy Here, Pay Here Loan?
A buy here, pay here (BHPH) auto loan typically offers car buyers with credit issues the option to shop for and pay for a vehicle (typically a used car or truck) at a single dealership. The loan model offers convenience, quick approval and easy eligibility requirements. These features make a BHPH loan an attractive option for borrowers who are in a hurry to get behind the wheel of their new car and/or borrowers who may not qualify for a traditional car loan.
As of 2020, the average credit score in Arizona is 706, which is in the “good” range.1
There are lots of potential pitfalls of a buy here, pay here car loan, including:
- High Interest Rates. Interest rates for used car dealership loans average 20%,2 or nearly five times higher than traditional auto loans.
The average credit card rate is approximately 16%.3 Purchasing a vehicle with your credit card might actually be a better deal than getting a buy here, pay here loan!
- High Down Payments. BHPH loans may require a high down payment. While this will lower your monthly loan payments, it may not be affordable for the borrower.
- Extra Fees. BHPH dealerships often tack on extra auto fees without the borrower noticing. These can include application administration, inspection and delivery fees. If you go this route, be sure to question every charge.
- Extended Loan Payoff Term. The longer your loan term, the more you’ll ultimately pay in interest charges. BHPH loans often require a minimum loan term of 60 months or more.
- Quick Repossessions. With an auto loan, the vehicle purchased with the loan acts as collateral and is at risk of being repossessed if the borrower defaults on the loan. BHPH dealerships are especially quick at repossessing vehicles and may send a tow truck to get your car after missing just one payment.
- Limited Vehicle Selection. BHPH lots generally offer older-model used cars that may also be overpriced and/or have high mileage.
- Possibility of Tracking Your Car. Some BHPH lenders require borrowers to place a vehicle tracking device on their cars or even have remote engine kill-switches that will disable the car if you don’t pay.
- May Not Build Credit. BHPH dealerships may not report loan payments to the three major credit bureaus. This means your auto loan won’t help you build or boost your credit score.
Alternatives to Buy Here, Pay Here Loans
If you’re in the market for a new car and you’re wary of taking out a BHPH loan, here are some great alternatives to consider.
First, if you can afford it, consider paying cash for your new car. You’ll save on interest charges and you’ll own your vehicle outright before you even drive it off the lot.
If a cash purchase is not an option, consider boosting your credit score before shopping for a car. This way, you’ll qualify for a traditional auto loan with a favorable interest rate without resorting to a dealership loan that may not serve you well.
The average used car loan interest rate is 2% less at a credit union versus a bank4 and nearly 17% less than a buy here, pay here loan.
Finally, consider taking out an auto loan through a credit union. Credit union auto loans boast easy eligibility requirements, favorable loan terms and best of all, interest rates that fall a full two points below the national average.4 You could save money each month on your loan payments when you choose a credit union!
Buy here, pay here loans offer convenience and easy eligibility requirements; however, there are multiple pitfalls involved in these deals that borrowers may not be aware of when choosing a loan. Before going with a BHPH loan, consider the potential downsides and the alternative options you have.