How Does Buy Here, Pay Here Financing Work?

When shopping for a car, you may come across a seller that promotes a "buy here, pay here" financing model. With this type of financing, you can usually qualify for a car loan even if you have bad credit. At the same time, this type of financing is typically not as attractive as regular financing if you have good credit.

Buy Here Pay Here

As the name suggests, this method involves financing the car from the same place that you buy it from. With this method, you go to the dealer and pick out a car that you want to buy. Then you fill out some information with the auto dealer. At that point, the dealer approves you for a car loan that is provided directly from the dealer to you. You typically have to make payments every week or every other week to the dealer, according to AutoTrader.com.

Bad-Credit Financing

The major draw of buy here, pay here financing is that it caters to those with bad credit. In fact, most of these dealers do not even require a credit check before they will approve you for a loan. This leads many who have had bankruptcies or other credit problems to come to these dealers to acquire a car. To qualify for this type of loan, you typically have to have a job and a regular income that would allow you to make your payment for the car.

High Interest

To make this work, dealers that offer buy here, pay here financing must charge very high interest rates. With this type of financing, the lender knows that a certain number of people will default on the loans at some point. They factor this in when calculating the interest rate that they will charge to borrowers. If someone defaults on a loan, the lender still makes money because it charges enough interest to the other borrowers to make up for it.

Considerations

If you have poor credit, this may be your only option to get a car. Even though you have to pay a very high interest rate, it is often better than having to do without a car. You can move forward and pay the interest rate while you build up your credit. That way, the next time you buy a car, you can do so at a more reasonable interest rate.