What are the Reasons to Avoid the 'Buy Here, Pay Here' Auto Dealerships?// Auto Loan// Car Finance

           

What Does Buy Here, Pay Here (BHPH) Mean?

Buy Here, Pay Here (BHPH) is a phrase used to describe car dealerships that provide in-house financing for the vehicles sold. For those with low credit scores who need a car, buy here, pay here dealerships could be a viable option.

While it may seem attractive, the interest rates for buy here pay here auto loans are generally higher compared to other lenders. Moreover, the dealer may claim an inflated price for the car, which may exceed its actual worth after including interest and fees. This write-up elucidates the process of buying a car through the Buy Here pay Here scheme, even if you possess a poor credit history.

How do Buy Here, Pay Here, car lots operate?

A Buy Here, Pay Here car lot is a type of dealership that not only sells cars but also offers auto loans. These dealerships are experts in assisting individuals with poor credit get a vehicle. Although they require a relatively small down payment, they usually charge high interest rates. Buy here, pay here dealerships typically sell low-price used cars, whereas traditional dealerships concentrate on selling new vehicles or used cars in fine condition.

Buy Here, Pay Here dealerships earn from  two sources. One is from selling cars, and the other is from providing car loans. This is where these dealerships deviate from traditional ones. Traditional dealerships only earn money from selling cars, and they don't offer in-house car loans like buy here, pay here dealerships. Traditional dealerships depend on third-party financing from banks and other lenders that specialise in auto loans.

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What is the impact of purchasing a vehicle from a buy here pay here (BHPH) dealership on my credit score?

Not only will purchasing a car from a BHPH dealership negatively impact your credit score, but it may not improve it either.

Advantages and Disadvantages of BHPH:

BHPH dealerships are experts in assisting individuals with poor credit or no credit history. However, before deciding to work with a BHPH dealer, it is essential to consider both the pros and cons.

PROS:

👍 NO CREDIT BOOST:

A significant benefit of getting an auto loan is that it boosts your credit score. However, since these dealerships do not report the loan to a credit bureau, the loan cannot be used to increase your credit score.

👍 Approval for Credit-Challenged Borrowers:

If you have bad credit or haven't had a chance to establish a credit history, financing a car through a dealership can be a viable option. With a BHPH dealership, approval standards are lower than with traditional lenders.

👍 SIMPLE PROCESS:

When you purchase a car from a BHPH dealer, the entire buying and financing process is completed when you drive off the lot.

CONS:

👎 HIGHER INTEREST RATES:

BHPH dealerships may charge higher interest rates than conventional lenders because of the risk involved in working with credit-challenged borrowers.

👎 LIMITED VEHICLE SELECTION:

BHPH dealerships may have a limited selection of vehicles available for purchase, and the quality of the cars may not be as high as those found at traditional dealerships.

👎 Potential for Repossession:

If you fail to make your payments on time, BHPH dealerships can quickly repossess your vehicle, leaving you without transportation and further damaging your credit score.

What exactly is a BHPH dealership?

BHPH dealerships are known for offering car loans without checking credit scores.

Even if you have a very low credit score, you can still be approved for a loan at a BHPH dealership if you can prove that you have enough income to make the payments. However, in most cases you will also need to make a down payment. BHPH dealerships use your fixed income and down payment to assess your eligibility.

While the idea of getting approved for a car loan regardless of your credit situation may seem appealing, there are some drawbacks to in-house financing. If you are struggling to manage a car loan from a BHPH dealership, it could damage your credit. Here's how.

A BHPH Dealer Can Not Improve Your Credit:

BHPH dealerships generally do not report auto loans to the credit bureaus. This means that even if you make perfect, on-time car payments, your credit score is unlikely to improve.

However, if you miss or make a late payment, these dealerships usually report it, which can hurt your credit. A missed or late payment can stay on your credit report for up to seven years.

Additionally, if you are considering buying a car from a BHPH dealer, you may end up paying more than the car is worth. These dealerships only offer used cars and usually charge higher than average interest rates.

A Repossession Damage Your Credit:

If you default on the loan and your car is repossessed, your credit will suffer even more. A repossession can stay on your credit report for up to seven years, and you'll have to pay additional fees to the dealer apart from the deficiency balance.

When your vehicle is repossessed, the BHPH dealership hires a recovery firm to bring it back to the dealership, where it is inspected and resold.

However, since the value of the car is likely to be less than the loan amount, you will be responsible for the shortfall, also known as the deficiency balance. Additionally, you must settle any costs incurred by the recovery company for towing the automobile.

Failure to promptly settle deficiency balances and towing costs may result in the account being turned over to debt collectors, which will negatively impact your credit history. You are more likely to default on an auto loan if you have a high interest rate, as it will result in a higher monthly payment.

Improve Your Credit Score:

Request family members with excellent credit to add you as an authorised user on your credit card account.

Avoid frequent applications for new credit.

After raising your credit score, you may have a greater chance of securing car financing from a traditional dealership.

Secure a Co-Signer:

Most conventional auto lenders allow you to apply for an auto loan with a co-signer to increase your chances of approval. A co-signer acts as a backup in case you are unable to make your payments, reducing the lender's risk.

Explore Borrowing from a Local Credit Union:

Credit unions typically offer lower fees and loan rates and may be more willing to lend to people with poor credit. If you're already a member of a credit union, check your eligibility.

Second Opportunity Auto Loans:

Second chance auto loans are loans intended to help people with poor credit get the financing they need. Instead of focusing on your credit, second chance auto lenders typically check your income and expenses, housing, employment stability and other factors to resolve your eligibility.

The Bottom Line of the Matter:

Securing an automobile loan with a poor credit score or complete lack of credit history can be a challenging task, but it is not impossible. When buying here, pay here dealerships offer financing to individuals with poor credit ratings, the cons outweigh the pros.

Therefore, it is advisable to evaluate and score your credit report and explore alternative means that can help you achieve your objectives while being more economical in the long run.