If you’re having trouble getting an auto loan with bad credit to buy a car then your options may be limited. A “buy-here, pay-here” (bhph) dealership offers in-house auto financing with a focus on bad credit car buyers.

This route may seem worth it if you’re in a tough credit situation but you’ll want to make sure you fully understand what these dealerships are some of the pitfalls before going to them. A bhph dealership is often used as a last resort for most car buyers with bad credit.

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What is a BHPH car dealer?

A buy-here, pay-here car dealer is a type of dealership that allows customers to finance their vehicle purchase through the dealership itself. Customers make their payments to the dealership directly, rather than to a bank or other financial institution.

BHPH dealerships are often referred to as “tote the note” dealerships because they allow customers to finance their vehicle purchase without having to obtain a loan from a bank or other financial institution.

Many BHPH dealerships cater to customers with poor credit histories, as traditional lenders are often unwilling to provide financing to these individuals. As such, BHPH dealerships typically charge higher interest rates than what would be offered by a traditional lender.

These dealership are usually considered an independent car dealer since they handle everything themselves. They are usually not tied to a franchise car dealer brand like Ford or Chrysler. You’ll find these dealerships with a local person’s name and likely advertisements around “guaranteed financing”.

If you’re considering purchasing a vehicle from a BHPH dealership, it’s important to be aware of the potential risks involved.

Pros of a Buy-Here, Pay-Here Car Dealer

As mentioned, a BHPH car dealer should be one of your last resorts. A lot of the lending these car lots do is predatory and they get a lot of bad press because of their methods. However, if your only option is a BHPH car lot they do have some positives to look into.

First, if you have no credit or very bad credit it’s likely that a BHPH car lot is your only option to get financing for a car. A BHPH car loan is known to not require credit or requiring very little credit to purchase a car. Most of these types of car lots go based off of income and what you can pay each month.

Second, depending on your financial situation and monthly income it’s very easy to negotiate with these dealers. Many are willing to accept negotiated offers and even much older trade-ins if your old car decided to stop working. In some cases you can get a pretty decent car for much less than a standard car lot.

Lastly, many BHPH dealerships try to sweeten the deal to get people to use their services. They will offer CarFax reports, extended warranties and many do offer certified pre-owned cars.

Cons of a Buy-Here, Pay-Here Car Dealer

The general rule of thumb is to avoid a dealership that offers “guaranteed financing”, however, in some cases that isn’t an option. If you’re down on your luck and your credit isn’t in the best shape to get a traditional loan or you can’t find a cosigner for your auto loan then you may have to use a BHPH dealer.

If you are someone who needs a BHPH dealer you’ll want to make sure you do your research and really understand what you’re getting yourself into. Because of your situation you’re already at a greater risk for defaulting or not being able to make payments and they know this. BHPH car lots are very predatory to car buyers.

Before you go to a BHPH car dealer make sure you understand the watch-outs:

  1. You will likely have a much higher interest rate than with other financing options and it’s not uncommon to see interest rates above 10%.
  2. You may be required to make weekly or biweekly payments instead of monthly.
  3. The dealer may not always report your positive payments and standing to the credit bureau monthly and instead do it every 3-6 months, if at all.
  4. The selection of cars to choose from may not be large and many cars may have issues as most are secondhand.
  5. You will likely have to place a 20% down payment or more depending on your credit.

BHPH vs. Traditional Car Dealers

The biggest difference between a BHPH car lot and a traditional car dealer is the financing options they provide. A BHPH car lot tends to cater to people who have bad or no credit whereas a traditional car dealer will focus on clients who will pay cash or are able to secure auto loan financing.

A BHPH car lot will not provide auto lease financing or even help you refinance your current car loan.

The traditional financing options typically include in-house dealership financing, nationwide bank, local credit unions or even loans from manufacturers themselves.

The BHPH car dealer will provide all financing themselves and handles most of their terms similar to how a rent-to-own car dealer would where you make payments on the car in a weekly, biweekly or monthly manner.

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Do Buy-Here, Pay-Here Loans Impact Your Credit?

Yes, just like other financing lenders a BHPH car lot will report your loan to the credit bureaus.

However, you need to be careful as most BHPH car dealers will not report on-time payments but are very quick to report if you miss a payment or default on the financing. As you negotiate your terms make sure you layer in on-time payment reporting so it can improve your credit score over time.

Keep in mind that not all BHPH car lots report your payments and because of your financial situation you may be at the liberty of their discretion to report. A BHPH car lot will report any missed payments or delinquencies to the bureaus and that will hurt your credit even more.

If you default on your financing and they repossess the car from you it will remain on your credit for 7 years and you’ll likely not be able to get another car again without paying cash.

Alternatives to Buy Here, Pay Here Financing

The clear alternative to a buy-here, pay-here financing deal is to go through traditional methods. If you do enough research and talk to enough dealers some may be willing to work with you to get you in a car, even with bad credit.

Below is a list of common alternatives to BHPH financing:

  • Purchase a car from a private seller. You can use Facebook, Craigslist, AutoTrader or several other marketplace websites to find private cars for sale.
  • Find a subprime lender. These are third-party lenders not tied to a car dealership that have dedicated special finance departments to get you approved for a car.
  • Add a cosigner to your car loan. The best way to reduce risk for lenders is to share it with others. By adding a cosigner to your car loan you are lowering the risk that the loan will default dramatically. The bank is a lot more willing to give out a car loan when two people are on the loan.
  • Make a larger down payment. The goal for lenders is to reduce risk and increase the likelihood that you’ll pay them back. If you’re trying to use standard auto financing or in-house with a dealer you can often get approved by putting more cash down. Try putting down 20-25% of the car’s worth as a down payment and many will approve you with bad credit as long as you have stable income.

How Does Buy-Here, Pay-Here Financing Work?

A bhph car dealer offers financing to all credit types but caters to less creditworthy car buyers. These dealers offer in-house financing which means they are the car dealer and the bank.

These car lots aren’t quick to check your credit which makes it easy to get a car loan but it can come with negatives. Because they are the financier for your car loan they control things like the length of loan, down payment and interest rate. You’re often at liberty of what these dealers want to sweeten the deal for themselves.

Is BHPH financing a good idea?

If your only option is to use a bhph car lot to purchase your next car it can be a good idea. You’ll want to weigh your options heavily before jumping into a car from these dealers.

In many cases these dealers may be your only shot at getting back on the road. Just make sure you do your research and you buy from a reputable car dealer.