What is a "buy-here-pay-here" car dealer?
Most car dealers do not provide their own loan financing for customers. They arrange financing with banks, credit unions or loan companies. However, one type of dealer, called "buy-here-pay-here" dealers, do self-financing. The loan comes directly from the dealer rather than a bank or loan company.
Buy-here-pay-here car dealers can be recognized by signs in front of their businesses — "we finance anyone", "no credit, bad credit, no problem", or "no credit approval needed." Clearly, these kinds of dealers specialize in selling and financing cars for people who have poor credit and are unable to get car loans through conventional sources.
Buy-here-pay-here dealers are sometimes called "tote the note" dealers.
How do buy-here-pay-here dealers work?
Buy-here-pay-here (BHPH) car dealers typically seller older cars at prices that are typically higher than market value (as determined by available price guides). A down payment is usually required, which covers the dealers cost for the car. The rest of the price is financed at at a very high interest rate, only limited by state usury laws, which is how the dealer makes his money.
BHPH dealers don't check customer's credit, nor report credit, since their risk is protected by up-front cost recovery, high interest rate, and a tight repayment plan. So, if you buy with a loan from a BHPH dealer, don't expect your credit to improve even if make all your payments on time.
Payment plans are typically set up such that customers must pay on a weekly or biweekly basis. Payments often must be made in cash directly at the dealer place of business.
To make sure a customer makes payments as scheduled, many BHPH dealers install starter interrupter devices that will disable a vehicle if a payment is late or missed. It requires that the customer enter a new code, provided by the dealer, after each payment. If the new code hasn't been entered by the time the old code expires, the car will not start.
Some buy-here-pay-here dealers also install hidden GPS locator devices on cars such that, if payments are missed, the car can be easily found and repossessed.
If a customer misses payments, his car is repossessed and put back on the dealer's lot to sold again. Since the dealer has usually already recovered his cost, and possibly already made some profit, there may be no attempt to recover any other money from the customer, nor is the repo reported to credit agencies. A high percentage of BHPH dealers' cars are eventually repossessed and resold.
Should you buy from a buy-here-pay-here car dealer?
It depends. Knowing that you could be over-paying for your car, and that you'll be paying a very high loan interest rate, you should explore all other options first.
If you have bad credit and need a car, try to get a conventional loan at a bank, credit union, or loan company. Having a co-signer may help if the co-signer has good credit. A co-signer is usually a family member who is willing to assume responsibility for making payments if the primary borrower (you) is unable to do so.
Without a co-signer, you could consider borrowing from family or friends or saving money for a cash purchase.
If none of these options work for you, then buying from a buy-here-pay-here dealer may be the only option left for you. If you must do it, just understand how such dealers work and that you'll pay more for your car and loan.