Most car dealers do not directly finance loans on cars they sell. They work with outside banks and finance companies to provide loans for their customers. It’s up to those banks and finance companies, not the dealer, to approve and provide customers car loans.
However, a different breed of used car dealer, called “buy-here-pay-here” dealers, do provide their own financing without an outside bank or loan company. They primarily function to sell used cars to people who have bad credit and cannot get approved for loans from conventional sources.
Buy-here-pay-here (BHPH) dealers can be recognized by their promotional ads or storefront signs. They use the terms “easy finance” or “no credit checks” or “we finance anybody” or “in-house financing” or “fast loan approval” or “we approve you regardless of your credit.” They are sometimes called “tote the note” dealers.
How do buy-here-pay-here dealers work?
BHPH dealers typically sell older used cars for higher-than-market prices. They may ask for a down payment that essentially covers their investment in the car. Then the customer pays off the rest of the amount with a high-interest loan, which is the dealer’s profit. There is no credit check because the interest rate charged is the highest allowed by the usury laws in that state.
The loan might be divided into 12-18 months of payments that are set up on a strict weekly or bi-weekly schedule. In many cases, the payments must be made at the dealership in cash or money-order. Personal checks are often not accepted.
Many BHPH dealers use special devices on the cars to make sure that customers pay on time and don’t skip town. One device is a starter interrupter. If a customer is late with one payment by even a day, the car will not start, and cannot be reenabled until the payment is made and a special code is punched into the device. If a payment is missed (late by more than a couple of days), the car will be immediately repossessed — no 30 day grace period. A GPS locator device hidden on the car tells the dealer where the car can be found.
If a car is repossessed, it is usually placed back on the sales lot to be sold to the next customer. BHPH dealers normally do not report repossessions to credit agencies. In some cases, a repossessed car might be sold at wholesale auction and the customer billed for the balance of his loan. This can happen if the car has been damaged or wrecked.
Should you use a buy-here-pay-here dealer?
Buying a car from a buy-here-pay-here dealer is an expensive option, but if it is your only option, and you know how it works, then you can use it.
Make your loan as short as possible to reduce the effects of the high interest rate. Have the car inspected by a qualified mechanic before you buy because such cars are sold “as-is” without warranties or guarantees. The dealer is not obligated to fix problems after the sale. Check out the dealer at your local Better Business Bureau (find their web site or call them on the phone).
Don’t expect your credit to improve if you make all your payments on time. Just as BHPH dealers don’t check your credit when you buy, they also do not report your good (or bad) payment record to the credit agencies. Unless your credit score improves for other reasons, you’ll end your loan with the same bad credit as when you started.
In summary, buy-here-pay-here dealers exist for a reason: to sell cars to people who have bad credit or no credit and are not able to buy a car any other way. On the other hand, they are often viewed as predatory, taking advantage of people’s misfortune with high prices and maximum-allowed interest rates.
You may be able to get a better deal from conventional discount used car dealers in your area. You can get free prices quotes from these dealers from the UsedCars.com web site. These dealers may also be able to find you a loan source.