If you’ve been turned down for an auto loan by traditional lenders you are not alone. It also doesn’t mean that you won’t be able to purchase a vehicle, only that you might want to consider other financing options.
Buy Here Pay Here Financing
When your car loan application has been denied by traditional lenders due to your poor credit score or history it might be time to consider a Buy Here Pay Here (BHPH) dealership.
At a BHPH car lot the financing is usually arranged in-house, which means your monthly loan payments will be made directly to the dealership.
Often all you need at a BHPH lot is a verified address and employment to drive off the lot that day in a “new” used vehicle.
BHPH Auto Lots vs. Traditional Dealerships
There are several noticeable differences between BHPY auto lots and traditional car dealerships, other than their willingness to approve your application for financing.
Your monthly or in some cases bi-weekly auto loan payments might also have to be made in person, instead of being mailed in. This means that it might be more convenient for you to find a BHPH dealership close to work or your residence.
BHPH Benefits
There are a few benefits associated with Buy Here Pay Here lots that might make it worth your time to at least consider applying for financing through one. These include,
- They are willing to offer financing to customers that have been turned down by traditional lending institutions due to imperfect credit scores.
- If the BHPH lot reports to the credit bureau making the auto loan payments on time can help raise your low FICO score.
- Most BHPH lots are willing to accept older vehicles as trade-ins, unlike traditional dealerships, and this can help reduce the amount needed for the down payment.
What Everyone Should Know About BHPH Dealerships
Before you decide to purchase a vehicle from a BHPH car lot there are a few things you should know. If you’re not familiar with applying for a bad credit auto loan through a BHPH lot, you could end up with a vehicle that costs more than you can comfortably manage.
Unlike banks and credit unions where your entire financial picture is carefully looked at, this isn’t always true at BHPH lots.
To ensure that your experience at a BHPH lot puts you behind the wheel of a vehicle you can make timely payments on, here are a few tips to help you get started.
- What is your credit score?
As soon as you start thinking about buying a new or used vehicle, the first thing you should do is check your credit score. Knowing your credit score ahead of time can give you some leverage when negotiating the terms of the car loan. It will also give you a good idea of what type of vehicle you should be approved for.
Even though most BHPH car dealerships are reputable scams can occur, and knowing your credit score is one of the best ways to protect yourself.
- Watch out for the “Yo-Yo trap”.
Even though this is illegal, some dishonest BHPH lots will try and increase the amount of the payments or interest rates after you’ve owned the vehicle for a few weeks. If you don’t accept the new conditions of the car loan, the vehicle will have to be returned to the dealership.
While this scam is rare, thanks to stricter enforcement of federal laws, it is still important that you make sure that all the terms of the auto loan agreement are finalized before driving the vehicle off the dealership. Simply taking the time to read the documents before signing can prevent this and other problems.
- Credit problems cannot be hidden.
Some people mistakenly believe that since the financing is through the dealership their credit history won’t be thoroughly checked. This couldn’t be further from the truth. Your past credit problems will be scrutinized and the dealership will have questions. It is always best to be upfront and honest, especially when financing through the BHPH lot is your only option.
- How much can you afford?
The majority of BHPH lots won’t consider your other financial obligations. This might mean that you’ll be approved for a loan amount higher than you can afford.
When you are trying to decide how much car loan you can handle it is important to also factor in the cost of,
- Fuel
- Insurance
- Maintenance
- Annual registration/inspection
All of this will quickly add up, and affect how much you can pay on the loan each month.
- The length of the car loan.
Most industry experts recommend avoiding bad credit auto loans that last longer than 4 or 5 years. Even though extending the length of the loan can lower your monthly payments, over time you will end up paying more than the vehicle is worth. In some cases you could still be making monthly payments on a vehicle that is no longer under warranty.
- There will be a down payment.
The main downside for many bad credit auto buyers is the fact that they will need a down payment. The amount will vary depending on a few factors,
- Credit score/history
- Type of vehicle
Financial experts recommend a down payment of 20 percent, but this can be difficult for most cash strapped auto buyers with subpar credit. Most BHPH car lots will work with you on the amount of the down payment, but you should expect to pay something before leaving the dealership with a new vehicle.
- Price listed without haggling.
One advantage of purchasing a vehicle through a BHPH lot is that the listed price is usually exactly what you’ll pay. Often referred to as “no-haggle dealers” you might not be able to lower the vehicle’s asking price, but there also won’t be any surprise increases in the final loan agreement.
- There is a difference between a “vehicle service contract” and a “warranty”.
It is extremely important that you understand the differences between a “vehicle service contract” and a “warranty”.
- A warranty is offered through the manufacturer, and it is included in the vehicle’s closing price. These warranties typically last for 10 years or 100,000 miles, and will cover most problems that occur during this time. You might also hear them referred to as “bumper to bumper” warranties since they usually cover everything in between.
- Vehicle service contracts are similar to warranties, except that they are offered at an additional cost. They are often recommended on used vehicles that might not be covered under the manufacturer’s warranty. While a vehicle service contract might cost extra, the good news is that some BHPH dealerships will let you extend the coverage for added protection.
Congratulations! You Purchased a Vehicle
Now that you know what to expect at a Buy Here Pay Here dealership you’re ready to start shopping for a dependable vehicle. The buying process might be a little different, even how you make the payments, but this could be the best option for you if you have less than stellar credit.