For most of us, purchasing a car requires some form of financing. It’s hard enough to come up with a sizable down payment, let alone the tens of thousands of dollars it would take to buy a car in cash.

BHPH sign

But not all dealership financing options are created equally, and knowing what you’re getting into ahead of time can be the key to avoiding sky-high interest rates and over-borrowing.

In this post, we’ll discuss “buy here, pay here” or BHPH car dealerships, and explain how they differ from other types of vehicle financing options. We’ll start by talking about how financing at these dealerships works before moving on to discuss the drawbacks and benefits of this financial option.

Although BHPH dealerships may make purchasing a vehicle a more accessible option for borrowers with poor credit histories, these loans often come at a high cost — which means they should be approached with extreme caution.

So, ready to learn what you need to know to make an informed car-buying decision? Read on!

What is “Buy Here, Pay Here”?

At many dealerships, financing is done through a separate financial entity, or bank, which works hand-in-hand with the dealership to provide fast, on-site loan approvals.

If approved, you’d be making payments to the bank in question — often a large franchise like Chase or Bank of America. (This is known as “dealer-arranged financing,” and is a convenient option — but you may also venture off-site to seek out a loan from these companies directly.)

But at a BHPH dealership, you’re getting a loan from the dealership itself, and your car payments will be made out directly to the dealership.

This kind of financing is convenient and may offer terms more lenient than those you’d likely find at a standard financial institution. That’s what makes BHPH financing attractive to borrowers with poor credit histories, or who may have little cash on hand to put toward a down payment.

Drawbacks and Benefits of BHPH Dealerships

There are both drawbacks and benefits to this kind of financing. Here are some brief considerations to keep in mind when deciding whether or not this kind of financing option might work for you.

Benefits

  • Poor credit history may still be acceptable. BHPH dealerships often extend loans to borrowers who have little or no credit history to demonstrate, and may sometimes even create a loan agreement with no credit check.
  • Small down payment options are available. These dealerships frequently allow borrowers to purchase a vehicle with very little (i.e., $500), or even no, money down up front.
  • Parsimony of process. When you purchase from a BHPH dealership, the car-buying process is simplified. You shop for, negotiate, and pay for your vehicle all with the same company and customer service team.

Drawbacks

  • High interest rates. Although in-house financing options may cater to borrowers with little or no creditworthiness, rates can be much higher than the ones you’d find at third-party financial institutions, according to the Consumer Financial Protection Bureau (CFPB).
  • You could end up borrowing more than the vehicle is actually worth. Traditional financial institutions typically limit the amount they lend based on a vehicle’s stated worth — a figure known as the “buy rate.” But dealerships have the discretion to create loan agreements for higher totals, often inflating the figure to compensate for their part in handling the financial transaction. This means you could end up overpaying for your vehicle not just in interest, but in principle.
  • The loans may not help build your credit portfolio. Diversifying your credit accounts and demonstrating on-time, in-full payments can help you build up your credit score and history — allowing you to get better deals in the future. But these financing options may not report to the major credit bureaus, which means you’ll miss the opportunity to use your car purchase to make these credit improvements.
  • The dealership may have installed tracking devices on the vehicle. Since these financing options are considered “high risk” loans for the dealership, some firms will install tracking devices to keep tabs on the car’s location in case they need to repossess the vehicle.

There Are Other Options for Buying a Car with Bad Credit

“Buy here, pay here” dealerships often attract customers who are already in a bit of a financial bind — and the steep terms of these deals can just exacerbate existing money problems.

But even if you have poor credit, it’s possible to find alternative vehicle financing options that offer much fairer terms and lower rates.

“In general, dealers and lenders are not required to offer the best rates available,” says the CFPB. “Even if you have poor or no credit, it may be worth it to see if there is a bank, credit union, or another dealer that is willing to make a loan to you.”

Contacting financial institutions directly is the best way to get a sense of what kinds of loan options are available, and you can compare terms from multiple locations before you make a purchasing decision.

It’s true that spotty credit or a low down payment will make for higher interest rates and more severe terms, even if you venture off-campus to seek out financing. But in many cases, these agreements will still be a better deal than the ones you’ll find at BHPH dealerships.

Furthermore, loans from major financial institutions will report to the best-known credit bureaus, thus giving you an opportunity to improve your creditworthiness for future transactions. (Psst: Here are eight proven steps toward better credit, no matter how low of a score you’re starting from.)

How Can I Find “Buy Here, Pay Here” Dealerships Near Me?

If you’re still interested in pursuing in-house financing at a BHPH dealership, you can find them in your area by running a simple Google search for the term and your zip code. Auto Trader also offers a tool for finding them, including filters for your preferred down payment, regular payment, and payment frequency.

Many family-owned car dealerships and franchises offer these types of loans to their prospective clients. But again, it’s important to remember that you have many different options when it comes to financing your new vehicle. And chances are, most of them will offer you better terms than an in-house loan at a BHPH dealership.