Navigating the 'Buy Here, Pay Later' Car Lots: Warning Signs and Tips
Buying a vehicle can be a necessity, but it can also pose challenges, especially for those with bad credit or no bank account. While individuals with excellent credit scores can secure a used car loan with an average annual percentage rate (APR) of about 6.8%, those with lower credit scores may struggle with APRs nearing 19%.
If traditional financing is unattainable, then the final option might be a "Buy Here, Pay Here" (BHPH) car dealership. These small dealerships specialize in selling cars to individuals who cannot secure traditional financing, promising not to check credit scores. While most BHPH dealerships are legitimate businesses offering a necessary service, caution is needed to avoid unscrupulous practices.
How Does a BHPH Loan Work?
A BHPH dealership functions similarly to any other car dealership. You pick a car, and then you work out the financing. The primary difference is that you borrow the money to buy the car directly from the dealership itself, allowing them to bypass the credit check and set loan terms as they please.
While this arrangement can be a lifesaver for individuals who cannot secure traditional financing, there are drawbacks.
- Limited options: Most BHPH dealerships first establish how much you can borrow before showcasing vehicles within your price range. The selection might be meager, with outdated and poorly maintained cars.
- High-interest rates: BHPH dealerships typically have high-interest rates, often around 20% but potentially even higher. Additionally, the high-interest rates hinder refinancing even if your credit improves.
- Frequent repayments: Some BHPH dealerships require weekly loan repayments, which can be challenging to maintain.
- Inadequate insurance: Because of the overpricing of the car, insurance may not adequately cover a total loss. Even if you secure full coverage, any settlement might be insufficient to pay off the loan, leaving you responsible for ongoing repayments on a destroyed vehicle.
- Large down payments: With a poor credit rating, you might need to make a high down payment to secure a loan.
If you decide that a BHPH dealership is your best option, exercise caution. Here are warning signs to watch out for.
No Loan Is Excessive
BHPH dealerships offer loans to individuals who cannot secure financing elsewhere, but if they represent loans of any size without a credit check, beware. This suggests that their business relies more on loan defaults than on selling vehicles or even profiting from interest on loans.
Most lenders have a limit on how much they will lend to individuals, even those with strong credit scores, to avoid making an unmanageable loan. However, some deceptive BHPH dealerships are willing to see you default on an unmanageable loan, seizing the down payment, repossessing the vehicle, and reselling it to someone else while causing no financial loss.
Spot Delivery
If the salesperson encourages you to take the car home while they finalize the financing details, leave the lot. You will likely receive a call explaining that there was a financing issue, and additional funds are required. This practice, known as "spot delivery," attempts to exploit your belief that you have already purchased the car.
GPS Trackers
Many BHPH dealerships require GPS trackers in the vehicle until the loan is paid off. While often legal, this raises privacy concerns and suggests that their primary focus is on repossessing cars rather than selling them or servicing loans. The presence of a tracker means the dealer expects you to default, and they have streamlined their repossession process to make it more convenient for them.
Lesson from the Used Car Dealership
BHPH dealerships may not invest in new upholstery or bodywork to keep cars in good condition before reselling them. This does not necessarily indicate a scam, but if the vehicle's condition is extremely poor, reconsider purchasing, even if the price seems reasonable. Additionally, be wary if the dealer pressures you to pay extra for a service contract.
By knowing these warning signs and protecting yourself, you can navigate the world of BHPH car sales more securely.
Additionally...
If you're in dire need of a vehicle, but your credit score is low for traditional car financing, a BHPH dealership might be an option. Be aware of the high-interest rates and unfavorable terms, and be on the lookout for red flags that might indicate excessive exploitation.
When considering buying a vehicle from a BHPH dealership, remember that you will need sufficient money for both the down payment and ongoing, high-interest payments. With proper caution and awareness, you can navigate this world more safely and avoid questionable practices.
