Growing up in the economically depressed, car-dependent Rust Belt meant that the big tax return checks we got in the spring often went to securing another family car. Most folks I knew who depended on these refund checks to make it through the year didn’t have great credit, either. Maybe it was poor money management or just the circumstances of being poor, but they were prime targets for the “Buy Here, Pay Here” dealership model.
Buy here, pay here dealerships have a bad rap, all of it deserved. Still, it can often be the only source to get a (somewhat) decent vehicle for the cash- and credit-strapped. But there are some choices that can be made at a buy here, pay here lot to minimize hardship and get the best out of a bad situation.
What is a buy here, pay here dealership?
For those with no credit or bad credit, securing financing may be nigh impossible at a traditional dealership or bank. Buy here, pay here lots get around this by also acting as the bank, too. They’ll loan you the money to buy a car from them.
"Buy here, pay here" sounds innocuous enough—it makes sense that you'd pay for something where you bought it, right? Well, it's a loaded phrase when it comes to car sales. In the context of a car dealership, typically, a buyer with a good credit score will get a loan from an established bank at a decent rate. The bank will pay the dealer, the customer will pay the bank, so you could say they are "buying here, paying elsewhere."
Not everybody has good credit, though. Or credit at all. If you fall into such a category and can't pay cash for a car, you'll need to borrow money from a lender willing to take on a "higher-risk" borrower. That's bank-speak, not ours, but if you have no credit history or bad credit history the lenders are going to want a higher interest rate. Much higher, oftentimes.
BHPH dealerships will often extend loans to people a bigger bank would dismiss, but the catch is they will generally get a crazy-high interest rate. Consumer Reports found that even qualified credit-holders paid much higher interest rates at a BHPH, compared to a traditional dealer or lender. These loans are oftentimes at or near your state’s legal limit (if it even has one). For example, it’s pretty common to see buy here, pay here lots in Ohio underwrite loans for 24.99 percent, just shy of Ohio’s 25 percent limit.
Buy here, pay here car dealerships aren’t always obvious, either. Heck, some even do offer some form of outside financing, albeit not great. Some examples straight up say “Buy Here, Pay Here” on the building, but some might use gentler euphemisms, like “Credit Acceptance.” Others, like DriveTime (which is owned by Carvana), run an operation that feels a lot less ramshackle and a lot slicker and corporate, with customer service and shopping tools that feel as legitimate and dignified as any other big franchise dealership. Make no mistake, DriveTime is a buy here, pay here dealership. “Our exclusive in-house financing model allows us to provide flexible options for all,” the site says, before straight-up admitting it’s a buy here, pay here dealership.
Holy crap, why would I even buy anything from here?
If you’re asking that question, you probably have the liquid cash and credit score to choose not to shop here. Those who are at buy here, pay here lots often do not. If you’re on a buy here, pay here lot, that generally means you lack the credit and money to be someplace better.
For example, take my friend Nathan Coffee. Although successfully employed as an engineer now, back in 2009, he was a poor 20-something making $8.00 an hour at the customer service desk hocking electronics at HHgregg (remember HHgregg?).
One day, on his way to work, the timing chain in his Mitsubishi Eclipse snapped, destroying the engine. He desperately needed transportation to get to work and had no other options: no cosigner, no credit, no huge lump of cash. He ended up on a buy here, pay here lot, and was approved for a 1999 Pontiac Sunfire that he described as a “high mileage heap.” The car was $6,000, already far too much money for a Sunfire with close to 100,000 miles, even in 2009. The car was financed at Ohio’s usury limit of 24.99 percent. After five years, Nathan paid more than $12,000 for a very used Sunfire, only to sell it for $1,000 sometime in 2013. Luckily, he was able to pay the vehicle off, but 37 percent of all buy here, pay here loans end up in default.
It doesn’t take a mathemetician to see how easily someone without the means to get ahead could get trapped in a bad loan and crappy car, forever paying on a worthless pile of crap. Meanwhile, if the car gets defaulted on, the car will be repossessed, and then resold. John Oliver’s rant about a worn-out car that went from owner to owner is probably the best illustration of what a buy here, pay here lot does. It’s an extremely predatory system for selling cars, and while it’s billed as a “last stop” for people with no other options, it can easily contribute to them being kept in cycles of poverty and heavy debt.
But life is hard, and I don’t judge. Like Nathan, I know that finding transportation with little money and credit is hard, so here are some tips to help you make the best of a bad situation if you happen to find yourself at a buy here, pay here Lot.
Check your credit score. Maybe it’s not so bad
Auto manufacturers want to get butts in seats, for better or worse. Is there an impending auto loan credit bubble about to pop? Maybe so; at the very least, interest rates are marching upward, but arguably that isn’t so material to the problem at hand. You need a car. I am focused on getting you solid, reliable transportation. Some manufacturers (cough cough, Nissan) have outlined lending for subprime customers that are competitive with buy here, pay here lots. Or, maybe your credit is good enough to get a “real” loan with good interest at a credit union or other bank. You’ll never know until you ask.
Free credit reporting sites, like Credit Karma, might give you somewhat of an idea of your credit score, but Credit Karma’s free credit score reporting only uses two of the three credit bureaus; TransUnion and Equifax. Unfortunately, most auto loan places tend to use a special version of the FICO score, called the Fico Auto Loan Score. This is a bit different than the regular credit score from Experian, TransUnion or the regular FICO score, some of the criteria, like missed or on-time payments are weighted differently. The best way to check a Fico Auto Loan Score is to go straight to the source and buy a credit report from FICO.
Go to the dealer informed, but be firm
The whole buy here, pay here experience can feel quite backward when compared to a typical dealership. Salespeople at BHPH lots often will first figure out what kind of payment numbers you can afford, often based on income alone. Credit checks are often irrelevant, since the whole loan, interest and all, is usually based upon how much the dealership thinks you can pay per month. Then, they’ll show you what cars they’ve qualified you for based on that information. The stipulations are often nonsensical, and the criteria are probably completely made up. Did you see that pretty-looking older Ford Escape online? Well, sorry, their math says you can only buy a high-mile, base model Nissan Sentra, even if technically they should cost about the same per month.
Do some research before you go. Most lots have their inventory listed online these days; go in with a specific goal with maybe a few specific models you’d want to purchase. Be firm, and explain in detail what vehicle you intend to purchase and that you’ll accept nothing else.
If they can’t do that, walk away. Remember, this dealership also acts as the bank, so their loan qualifications can be completely opaque and punitive. Some other buy here, pay here will probably have something better.
Ask if this loan reports to any credit bureau
Many buy here, pay here customers want to rebuild their credit; that’s why they’ve accepted a bad loan, in hopes of proving themselves to the credit companies that they’re responsible credit havers. People have the idea that a car loan with good payment terms will report to the credit bureaus, building a good history, and maybe the next vehicle purchase can be bought from a better dealership on much better loan terms.
Well, some buy here, pay here dealerships don’t report any positive payment history to any credit bureaus. The financing is between you and them, and this completely demoralizing experience doesn’t even build any credit. Yet, if the loan is defaulted on or payments are missed, that will be reported report a credit bureau. Read the loan paperwork closely, and be sure to ask the salesperson questions.
Mechanically inspect the car
Like any vehicle purchase, mechanically inspect the car before taking delivery. Take notation of any flaws or mechanical issues before you take delivery, and make sure the dealership knows. Preferably, in writing. If you don’t know how to mechanically inspect a vehicle, bring someone who does, or better yet, pay a mechanic for a pre-purchase inspection.
Be sure to ask if the vehicle has a clean title. Since a BHPH dealer often acts as the bank, they may not be beholden to the same title restrictions as regular banks or lienholders. It’s not uncommon for some vehicles on BHPH lots to have a rebuilt, reconstructed, or salvage title. Run a Carfax and find out where that car has been.
Make sure you understand the terms of your agreement
These cars are often sold at inflated prices, sometimes two or three times their book value. Salespeople at these places often talk in terms of the payment, less about APR, or what the car costs. Also, remember that it is a buy here, pay here dealership. Payment options may be weekly, or bi-weekly, and might need to be done in person. Sometimes, these cars have tracking devices and immobilizers that are triggered after a missed payment or breach of contract. Some contracts don’t allow you to drive the vehicle out of a specified geographic area.
It sucks, but make sure you ask plenty of questions. The numbers won’t be pretty, the terms aren’t great, but at least you’ll know what you’re getting yourself into.
The folks who are navigating these dealerships don’t have the energy for high-handed rants about fiscal responsibility or lack of public transit infrastructure. They’re often just trying to get by in a society built around car ownership, where a private vehicle is often required to get to a job (or jobs) so they can pay all their bills and survive.
Those arguments are functionally useless for the buy here, pay here buyer in search of transportation to fill an immediate need that isn’t being met. I don’t want to judge, I want to help. These lots are trash, but if you go in smart, have clear goals, and keep your wits about you, I promise you can get through this awful experience with your head held high.