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What Is In-House Financing?

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If you have a less-than-stellar credit rating but need to buy a car, a “buy here, pay here” dealership that offers in-house financing may approve you for a loan when other dealers won’t. But do your homework before driving away in a cheap car that could cost you more in the long run.

At a traditional dealership, you can use the dealer’s financing connections — typically, the manufacturer or partner lenders such as banks or credit unions — or find your own through a bank or credit union. However, a FICO credit score below 669 may prevent you from securing traditional bank financing, according to Experian, one of the three national credit reporting bureaus. The median credit score of auto loan borrowers when they took out their car notes has been above 650 since 2004.

It’s still possible to find financing if your score is lower than fair or even very poor, but the cost of borrowing may be more expensive. We’ll talk about what to watch out for when a dealer presents in-house financing and alternatives to buy here, pay here offers.

What is in-house financing?

The convenience seems appealing: you buy and finance a car at the same place. And for those with bad credit, advertisements that say “no credit check” or “No credit? No problem!” are even more attractive. When the dealership acts as its own “bank,” the dealer also finances the car loan, according to Experian. That means it can set interest rates and terms. This can help some buyers who aren’t able to secure traditional auto financing. In-house financing lots are usually a last resort for people who can’t qualify for a bad credit auto loan.

You’ll need to watch out for:

  • Potentially higher rates. Keep in mind that interest rates will most likely be higher than a bank or credit union. When LendingTree studied average APRs by credit score, those with the lowest scores received an average APR of 18.05%, but buy here, pay here dealerships may charge interest rates up to state maximums. In North Carolina, for example, lenders may charge up to 29% for used vehicles five years or older.
  • Fees and add-ons. There may be additional loan origination and late payment fees because the dealer carries the risk that the buyer won’t pay the loan back. It’s always a good idea to check your contract for dealer add-ons such as extended warranties, insurance products or appearance packages that you may not want or need.
  • Yo-yo financing. A day or two after you sign the car loan, the dealer calls and says your financing application was rejected or isn’t complete. You have to sign up for a new loan that may have higher interest rates or a larger down payment or return the car. Make sure you know if the contract is finalized before you leave the dealership

In most cases, buy here, pay here lots finance their own cars — instead of borrowing the money from a bank or credit union, the car buyer borrows money directly from the dealer. There are some instances where such businesses sell their contracts to finance companies.

Often these in-house loans are advertised as no-credit-check loans. That means the dealer won’t pull your credit score from the credit reporting agencies. It also means some dealers won’t report borrowing activity to those agencies, which could help you repair bad credit (assuming you make on-time payments). Buy here, pay here loans are based on your current situation, not your past.

You’ll still have to demonstrate your ability to pay back the loan, according to HBK, an accounting firm specializing in auto dealerships. The dealer may ask for:

  • Current pay stubs
  • W2 statement or other proof of employment
  • Utility bills or other proof of residence

The lender may want to verify how long you’ve had your current job. If you rent, the dealer will likely check with your landlord about your payment history.

The pros of in-house financing

Approval for bad credit. If you have bad credit, no credit history, filed bankruptcy, had a house foreclosed or been evicted from a rental, finding traditional credit may be very difficult. A dealer who offers in-house financing considers your current income and other factors in making a deal. Some still may look at your credit score, though it won’t be the sole factor in approving you.

Fast approval. Some dealerships, like MotorTrust in Abilene, Texas, promise online pre-approval in as little as two minutes. Once you get to the dealership it won’t take as long to fill out a thick stack of loan forms.

Customizable terms. You may be able to negotiate your payment due date so that it lines up with your payday so you’ll have the cash on hand. While it’s not usually advisable, a dealer could offer longer payment terms to make the monthly payment lower.

Low down payment. Many dealers offer zero or low down payments, say $500 or less. Of course, that means your loan amount and monthly payments will be higher. It also may not be available if your credit score is particularly low. In that case, you may have to pay significantly more, as much as 10% down.

Build credit. Ask if the dealer will report your payments to the three major credit-reporting bureaus. You can help build your credit score with on-time payments.

The cons of in-house financing

Inflated car prices. As with any dealership, buy here, pay here lots may mark up vehicle prices. Before you make a decision, use online resources such as Kelley Blue Book or NADAGuides to find out how much a vehicle is worth in your area. Otherwise, coupled with the potentially high interest rates, you could pay several times what the car is actually worth.

High interest rates. Interest rates are routinely high at buy here, pay here lots, 20% or higher. Find out what typical rates are for bank and credit union financing in your area.

Fees. Many states have interest rate caps, but dealers make money on added fees such as document and filing fees. Late payments can lead to extra fees, just like with a bank.

Strict terms and penalties. You may be required to make payments to the dealership in cash for example, and make payments every two weeks instead of monthly. There may not be a grace period if you’re late, and the dealership could repossess your car right away. Make sure you understand the terms before agreeing to the loan. Shady car dealers have been fined for not following regulations.

Where can you find in-house financing?

Local buy here, pay here dealers may use names like Rocky’s Auto Credit or EZ Credit or advertise “No Credit, No Problem.” There are national chains like J.D. Byrider and regional groups such as Cactus Jack’s in Arizona. You may be able to go to a franchise new car dealer for in-house financing as well.

What to know if you decide to get in-house financing

In-house financing will almost always cost more money in the long run than using other forms of financing, but if you need a car immediately to commute to work, it may be your only option.

Read the fine print on the contract to understand the fees involved, interest rates and what will happen if you are late or miss a payment. Some dealers could install a starter interrupt device that could make it impossible to start the car if you miss a payment.

Do your homework on the type of vehicle you’re looking for so you have a sense of its fair market value.

Research local banks and credit unions for current interest rates. Although you may not qualify for low rates now, understand what’s available, especially if you could postpone your purchase until you’ve had time to improve your credit. You can estimate your monthly payment with an online calculator.

The dealer will focus on monthly payments and may quietly extend the term of the loan to reach the payment you can afford. But longer terms mean you’ll pay more interest.

Alternatives to in-house financing

In-house financing is an option when you have bad credit, but it’s not your only option:

  • Get a cosigner. You could ask a family member or friend to cosign a traditional auto loan. That means they’re responsible if you don’t make the payments.
  • Repair your credit. Consumers can build up their credit score with a period of making payments on time, said Nancy E. Bistritz-Balkan, vice president, communications and consumer education for credit reporting bureau Equifax Inc.

“A consumer may want to consider postponing the application process until her credit score has improved in order to qualify for the best rates,” she said in an email.

Bistritz-Balkan also recommended saving up to pay cash for a car, or for a large down payment that might make it easier to get conventional financing.

You can apply for a loan with a credit union or other lenders that may be willing to work with people to build their credit. You could fill out a single online form on LendingTree where you may receive up to five different loans offers from lenders based on your creditworthiness.

For some people, buy here, pay here dealerships may be the only way they can buy a vehicle right away. Understanding the pros and cons can help you make the best choices if this is your only option.


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