There are a couple of area car dealerships that advertise “Guaranteed Financing. Bad Credit! No Credit! No Problem! Guaranteed on the spot financing available.” As the father of a teenage driver, I became curious to find out if this might be an option. What’s the catch? I also wondered would this option help build credit scores for the future. The answer is maybe.
It turns out that the dealerships that I saw advertised have both new and used cars. Those types of dealerships are not usually thought of as the traditional “Buy Here Pay Here” (BHPH) option. They sell only used cars and don’t offer bank financing at the traditional “Tote the Note” establishments. Some dealerships have different financing options depending on credit scores and history. As with any vehicle loan, the lower the credit score the higher the interest rate. The buy here pays here option is often reserved for those with the worst credit. Just as some people with excellent credit scores, classified as 800 or above, can get 0% interest on a new car loan. But there is a catch to them too.
BHPH dealerships are about 9% of total used car sales. They are self-financed. So, they don’t even need to check credit scores. They verify income. There are both Pros and Cons to purchasing a vehicle from these types of dealerships. If you have exhausted other options, such as using savings to purchase; traditional dealerships; getting a co-signer or purchasing from an individual then this may be the last option. “If you need a car quickly and can’t get an auto loan”, this “may be your only option.” A positive payment history may increase your credit score.
Some of the draw backs include not all buy here, pay here lots report a positive payment history. They only notify the credit bureaus if they repossess or history of late payments. Your selection may be limited, the dealer will qualify which vehicles you can afford and then you select from that group. Higher down payments and interest rates are also issues. Often interest rates are higher, around 20% than they would be if money was borrowed from the traditional lending institutions like banks or credit unions. (Third quarter of 2020 avg. at 5.32% banks and 3.24% credit union for a 4-year used car loan.) These loans are also often on older high mileage cars, so more is owed than the vehicle worth. Traditional lenders will only loan money based on the value of the vehicle; BHPH lots may not set those limits. Almost half of BHPH lots place trackers in their cars, so if the payment is late, it’s easier to repossess or even disable the vehicle. If you are looking for even more information on buying a car and auto loans – check out the Consumer Financial Protection Bureau’s Education Guide.
I discovered that higher prices, higher interest, worse credit…that’s the catch!