When buying a car, most of us go through the traditional route of dealers who utilize a number of lending sources to secure car loans. While this may be the weapon of choice for people with decent credit scores, for those with less than stellar credit, it can be a tough road.
Traditional lenders are hesitant to grant loans to folks with below average credit scores, and even if such loans get approved, many of these buyers will find themselves looking at sky high interest rates. With the more recent economic downturn, many dealers are opting to play it safe and only work with people who are in good standing with their credit.
There is an option for credit challenged buyers, however, the buy here, pay here lot. Buy here pay here dealers are set up where you buy the car and make your payments directly to the dealership. This is known as in-house financing and typically does not show up on any credit report.
When working with a BHPH, you make monthly or bi-monthly payments directly to the dealer, and most often you are required to make the payment in person, either with a check or cash. Some dealers have been known to rig their cars with a timer, designed to disable the engine if the payment date is missed. Once payment is brought in, the timer is reset for another month.
The biggest difference between traditional dealerships and BHPH lots is the order in which things occur. With traditional dealerships, you find the car you want and then discuss the financial arrangements. With BHPH, they determine your financial standing and then basically tell you what car or cars you are qualified for. This takes much of the joy out of shopping for a car, since nobody likes to be told what they can and cannot have, but it is a cold, hard truth of the business.
A typical visit to a BHPH lot will begin with having your credit pulled, the dealer developing an understanding of your financial situation, and then showing you a number of cars that you qualify for. Obviously BHPH lots are one of the prime stopping points for anyone who has had difficulty obtaining an auto loan.
There are three main benefits of going the BHPH route. 1) BHPH lots allow credit challenged folks to still be able to buy a car. In cases where the credit score is exceptionally low, a BHPH lot may be the only game in town.
2) It provides an opportunity to begin repairing your credit. Making payments on time, or even paying the car off early can really help to improve your credit score. Be advised that not all BHPH lots report to the credit agencies, so make sure and ask if they do before doing business with them.
3) BHPH lots are also more forgiving of older model trade ins, because they see the value inherent in getting the most long term use out of these cars. Many may actually go back out on the lot and be sold again, as opposed to traditional dealerships that wholesale out their older trades.
Of course, as with any car dealership, there are good ones and bad. The car industry has gone out of its way in many instances to earn the lousy reputation that it has. Don’t blindly walk onto and buy from the first BHPH lot you come to. Take the time to check them out and determine if they are legit, if they offer a quality service, and most importantly, if they report their deals to the credit agencies (Equifax, Experian, TransUnion).
If you do find yourself having to purchase a car in this manner, make your payments on time, each month, every month. Preferably before the due date and ideally more than what is required. Paying your car off early will really help your score, and have you back in the traditional dealership setting buying much better cars for better interest rates in a fairly short amount of time.
Bad credit is not forever. By developing and exercising good financial habits, you can become a much sought after customer! Now go therefore and ride in style.