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Why You Should Skip the ‘Buy Here, Pay Here’ Car Lots

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“No credit, no problem!” So say the many signs outside of a “buy here, pay here” car lot. This may sound appealing if your credit is poor and you need a vehicle right away. Most car dealers are in the business of selling cars, not lending money, but buy here, pay here places do both, for a high cost. Not only are their interest rates higher than most banks, credit unions or other lenders, they may sell the car to you for more than it’s actually worth. It may not feel like you have other options, but we’ll walk you through possible alternatives plus what to do if you decide a buy here, pay here lot is your best choice.

How do buy here, pay here car lots work?

If you go to a buy here, pay here dealership, you could pick out a car and apply for financing, much as you would at any dealership. But the financing doesn’t come from a bank, it comes from the car lot which is why it’s often called in-house financing. And the car lot often charges the maximum APR allowed by law. For example, you could be charged up to 21% for cars older than two years in Pennsylvania. North Carolina allows rates up to 29% for vehicles five years or older. That means if you got a car loan for a total of $10,000, a 29% APR on a three-year loan would mean you paid just over $5,000 for the price of the loan, on top of the $10,000 car. In this case, you would pay over half the car’s value just to get a loan.  By comparison, it’s possible to get a late model, used-car loan from a credit union for as low as 3.29%, for those with the best credit.

Why can buy here, pay here places do this? They can do it because it’s legal and many of their customers have no other way to get a car. Many people who go to buy here, pay here places have been refused by other lenders for having bad credit or no credit.

The pitfalls of ‘buy here, pay here’ places

If you can’t buy a car in cash and don’t have the credit to get a loan from lenders such as banks, credit unions or online lenders, even those specializing in bad-credit auto loans, then you may feel like you have little choice. Unless you live in a city with a great public transportation system, cars are necessary to get to work, pick up kids and get groceries. And buy here, pay here places advertise a lot of gimmicks to get you in the door, from a giant inflatable King Kong figure on the roof to “free lifetime warranties.”

High APRs. Buy here, pay here lots routinely charge high interest rates, 20% or higher. Different states have different interest rate limits for different types of cars. For example, the usury limit on car loans in Texas is 18% APR for a used car model that is two years old (or younger) and 23.99% APR for a car that is older than three model years. So if in 2019 you want a car that is a 2015 model or older, your APR could go up to 23.99%.

High car prices. Many buy here, pay here car lots don’t advertise prices on their websites because they want to charge the highest price possible based on how much they want to lend to you. For example, if you’re approved for a loan with a $300 monthly payment, they may raise the car price up to meet it even if the car isn’t worth that much.

Might not help your credit. Some buy here, pay here businesses don’t report your payment history to the three major credit bureaus, so even if you do pay on time, those agencies  won’t know and you lose an opportunity to improve your credit score. However, some will, so ask your salesperson if they report and to which agencies.

Costly add-ons. You may have to buy a warranty and/or a GAP insurance policy in order to get the loan. And if you can’t pay for them out of pocket, you’ll need to add them into your loan and pay interest on those products as well.

Tracking and disabling devices. Some buy here, pay here lenders will require that your new car has a tracking device so that if you don’t make your payments, they can send a tow truck to repossess it. Further, some of these devices are also disabling devices that make it impossible to turn the car on if you fail to make payments.

High down payment. You may be required to give a high down payment up front, so that the buy here, pay here business gets a hunk of cash off the bat.

High frequency of payments. While most lenders require monthly payments, buy here, pay here lenders may require weekly or biweekly payments. So you may have to go out of your way and visit the same car lot every week for a few years to make a payment with a cash or check.

Churning. This is a practice where disreputable buy here lots “churn” the same car, usually a lemon, by selling it, repossessing it as soon as legally possible when the buyer stops paying out of frustration and reselling it to the next person. Of course, the buyers never get any of their money back.

The potential pros of buy here, pay here car lots

It’s an option. If you can’t find an auto loan, even from a bad credit auto lender, and you need a car immediately, buy here, pay here car lots may be your best option. But before you agree to anything, see if any of the alternatives, below, might work instead.

It could help your credit. If the company does report to the credit bureaus, you could improve your credit by paying the loan on time and in full.

Alternatives for bad credit car buyers

Getting a car from a buy here, pay here place might not be your only option. There could be other options out there that allow you to get a car and not pay through the nose for it.

Pay cash. It always pays off to save up money for a car rather than borrow money, if you can afford to wait. And, if any used working car will do, you could probably get one for cheaper than you think.

Shop around for a car. You don’t have to buy from a car dealership to get a car. You could look at online sites such as Craigslist or go to a car auction. The two biggest tips in car buying is to make sure you don’t pay more than what the car is worth (you can use NADAguides or Kelley Blue Book to look up the car’s value) and to have an independent mechanic check out the car before you buy it.  

Don’t assume a lender will say no. If you do need a car loan, even if you have poor credit, you should still apply to lenders such as banks, credit unions and online lenders. If you are turned down, ask to talk with a loan representative to figure out how you can be approved. You may find out that you only need a slightly larger down payment.

Shop around for a loan. Apply to more than one lender. Do a few applications because not all lenders will say the same thing. And if a couple lenders approve you for an auto loan, you’ll be able to compare the loan offers and take the one with the cheaper APR. It doesn’t hurt your credit to apply to multiple lenders any more than it does to apply to one as long as you do so within a 14-day window. You could fill out an online form at LendingTree to potentially get up to five different auto loan offers from lenders, based on your creditworthiness.

Get a cosigner. If you know someone who has good credit, who trusts you, ask them if they would cosign an auto loan. 

In-house financing. Like buy here, pay here car lots, some franchised dealerships also have their own lending company. Shopping for in-house financing at a dealership rather than going to a buy here, pay here lot could mean that you have access to a wider variety of nicer cars.

What to do if you must purchase from a buy here, pay here lot

If you do decide that you will get a car and a car loan from a buy here, pay here car lot, here are some things that you should first to make sure that the business is fair.

  • Look it up on the Better Business Bureau (BBB). See if the business has any major complaints against it. If it does, you may want to find another business.
  • Make sure that they report to the credit bureaus. One of the main rewards for paying a loan on time is that your credit score goes up. But if the business doesn’t report to the credit bureaus that you are paying on time, your credit won’t change. If your credit doesn’t change, you may need to get your next car from a buy here pay here car lot and continue to pay a high APR. To find out, get them to tell you in writing that they do or don’t report loan payments to at least one credit bureau.
  • Check with your local government. Call your local office of consumer affairs and see if there are any complaints about the buy here, pay here car lot you plan to do business with.

If the buy here, pay here car lot does report to a credit bureau and doesn’t have any unresolved complaints against it according to the BBB and your local government, then you may be dealing with a relatively fair place of business.

The bottom line

It is wisest to skip the buy here, pay here car lots if possible — look to other lenders or other places to get a cheaper car such as Craigslist, find a cosigner with good credit or save up your money to pay for a car in cash or make a larger down payment. But if you must get a car and a car loan from a buy here, pay here car lot, do so carefully.

The information in this article is accurate as of the date of publishing. 


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