Editorial Note: We earn a commission on partner links on Forbes Advisor. Commissions do not affect the opinions or ratings of our editors.
Having fair or bad credit can prevent you from many loan opportunities, including buying a car. But some car dealerships work with borrowers who can’t qualify for a traditional car loan by offering what’s called Buy Here Pay Here (BHPH) financing.
BHPH dealerships may seem attractive to borrowers with low credit scores or minimal credit history, but there are risks that might not make them the best choice. Here’s what to consider before opting for BHPH financing for your next car purchase.
How does Buy Here Pay Here work?
When you buy a car from a traditional dealership, they send your request to an auto lender. If you are denied a loan, you may not be able to afford your car, especially if you were relying on financing to get your car. With BHPH, the dealer manages your loan and your car, so it’s both the dealer and the finance company.
Instead of finding the vehicle you want to buy and then obtaining financing like you would at a traditional dealership, BHPH dealerships do the reverse by:
- Funding first. The dealer will first see how much they are willing to lend you, which could be based on your creditworthiness and your down payment.
- Then you choose a vehicle. Along with the finance numbers, they’ll show you the cars that fit that range. You can choose from dealer inventory, but you may not always have many options.
With BHPH, you have a better chance of getting approved for a car loan for the vehicle you choose, as many of these dealerships do not have any credit checks or do not guarantee approval for borrowers with a bad credit.
To note: You may not see “Buy here, pay here” on documents or marketing materials. Instead, you may see phrases like “financing available” or “we’re financing” to attract buyers who don’t have good credit and need a car right away. Be sure to ask the dealership what type of financing they offer.
Buy here Pay here Prices
Car loans often have some of the lowest interest rates of any loan product. The average interest rate on new cars for borrowers with excellent credit was 2.47% and 3.61% for used cars in Q4 2021.
For BHPH borrowers, you can usually expect much higher interest rates on auto loans, usually between 15% and 20%.
Does Buy Here Pay Here affect your credit?
Most auto lenders will trigger a rigorous credit check on your credit file. So your score will take a temporary hit when you complete an auto loan application. But after a few one-time payments, your score should start to go up.
With BHPH, however, there’s a chance you won’t be hit with a hard credit check. Some lenders do not verify at all, and others will verify but do not hold bad credit scores against borrowers seeking financing.
Not all BHPH lenders will report your loan to major credit bureaus. This means that on-time payments will not increase your score because a loan might not be detected on the report. On the other hand, if you fall behind on your payments and your car is repossessed, your credit score might not drop like it would with a traditional car lender.
Related: What credit score is needed to buy a car?
Buy here Pay here Alternatives
A Consumer Financial Protection Bureau (CFPB) study found that you are more likely to become delinquent or default on your auto loan if you go through a BHPH dealership compared to traditional dealerships. This is not because the borrowers were more or less risky, but because the interest rates were so high.
If you have poor or fair credit and are in dire financial straits, BHPH might be appealing. You will most likely be approved and get in a car the same day with little to no approval process. But you might want to consider other options first.
Shop for loans
Instead of basing your choices solely on what you can get from the dealership, secure financing first. You can compare rates and options from different banks, credit unions, and lenders online. Review what you need to qualify, such as minimum credit score and down payment requirements.
Getting financing before you go to the dealership means you already have a way to pay for your car and don’t have to rely on dealer financing options to get one.
Find a co-signer
If you have a trusted parent, partner, or other friend, see if they co-sign your loan with you. This is a big commitment because they will be just as responsible for your loan as you are, but a co-signer can be a big help for many borrowers.
Just make sure you and your co-signer understand the risks and all of your refund options.
Negotiate with the dealer
If you’re getting financing through a traditional dealership, remember that the numbers aren’t final until you’ve signed a legal contract. Carefully review everything, including the total amount you are financing for the car, the interest rate, and your monthly car payment.
Try to negotiate a lower interest rate, if possible. But if the price can’t come down, see if there are other vehicles offered at a lower price that are more in line with what you can afford. You can also apply for a longer-term loan, which could lower your monthly payment. Keep in mind that this will likely make you pay more interest over the life of the loan.
Related: Best time to buy a car
Consider a personal loan
A car loan is not always your only financing option when it comes to acquiring a new vehicle. You can also use a personal loan to buy a car. Although personal loans don’t require a down payment or collateral — in this case, your car — they tend to have stricter requirements than car loans. They also tend to have higher interest rates. So before you decide, compare a few personal loan options to see if you can qualify for a lower rate or terms that suit you better.
Review all your options
While Buy Here Pay Here financing may seem like a great option if you have bad credit, it may not offer the best rates and terms. Consider all of your options before making a decision. Even with bad credit, you can find ways to finance a car that’s right for you and your finances.