Buy Here Pay Here Car Lots Explained
Are you having trouble getting a car loan because your credit score is too low? The good news is that your dreams of owning a car don’t depend on banks and credit unions. You can make your dream come true at buy here pay here car lots.
Some people refer to it as in-house car financing. So, what is it? It’s whereby a car dealership agrees to sell you a car on credit terms without involving a third-party financer. You won’t have to get approval from any bank or credit lender. In fact, a buy here pay here dealership doesn’t check credit scores.
1. How does buy here pay here work?
Each car dealership has a list of requirements for car financing buyers. When a customer fulfills these conditions, the dealership hands over the car keys. Your car title remains with your car dealership during the repayment period.
Sellers usually set their own interest rates and repayment plans. You can lower your car monthly payments by choosing the longest repayment period available. Just like any typical loan, late payments attract fines.
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2. What are the requirements for in-house car financing?
1. Earn at least $2,000 a month
You’ll present copies of your paycheck in order to prove that you have a steady source of income. Self-employed buyers come with copies of filed tax reports and bank statements. Dealerships verify this information by making phone calls or sending private investigators to visit your place of work.
Car dealerships are interested in buyers who can pay the average car monthly payment. Which is $523. However, the payment shouldn’t exceed more than 25% of a buyer’s monthly income. So that’s why you need a minimum gross monthly income of $2,000.
2. Proof of identity
Have you ever read a newspaper article about identity thieves who used victims’ identities to get huge auto loans? These victims suffer a lot because they have to track down the affected car dealerships to explain themselves. Sometimes, one has to hire an attorney to fast-track the process. However, it’s expensive and time-consuming.
Dealerships expect buyers to present their driving licenses and SSNs for identity verification. Some places even produce photocopies of staff IDs as an extra security measure. If you’re a foreign student, carry your college ID, passport and alien registration identification.
3. Resided in the city for a specified period
Notorious defaulters don’t reside in any city for more than two years because they’re constantly fleeing from debt collectors. This affects car dealerships in a couple of ways. First, the car seller spends money on private investigators tracking down the defaulter. Then, there are repossession fees to consider.
If you’re planning to get financing from a nearby dealership, you need to prove that you’ve resided in the city for at least three consecutive years. How? By providing the phone number of your property manager so that he or she can verify your residency. Dealerships also request for copies of your utility bills as proof of residence.
4. A cosigner
A cosigner is someone who guarantees to clear your outstanding balance in case you’re unable to meet your car monthly payments. However, not all dealerships have this requirement. It’s just an extra step towards avoiding outstanding balances turning into bad debts.
What do dealerships look for in a cosigner? He or she should meet a specified monthly income requirement. Dealerships also expect a cosigner to have an excellent credit score. Why? Because people with excellent credit ratings are good at paying debts on time. He or she should also have resided in your city for at least three consecutive years.
5. A down payment
In order for you to drive home in a new car, you need to pay a down payment at the dealership. Just like interest rates, each dealership has its minimum down payment. You need to have this amount available in your bank account because you cannot pay it with a credit card.
How much down payment do you need? Well, to be on the safe side, save up at least 40% of your auto loan’s value. Doing this helps you to get good car monthly payments by reducing your outstanding balance significantly.
3. What happens when you can’t pay?
The good news is that you won’t lose your car right away. Your seller will roll over a missed car payment to the next month. If your temporary financial challenges are over, you’ll just pay up both payments plus the accrued fines. Dealerships can only do two rollovers.
2. Loan renewal
If your business is experiencing a period of low sales, you can approach the dealership and ask them to renew your loan. The dealer works out lower car payments by imposing a new interest rate and repayment period on your outstanding balance. However, the repayment periods are a disadvantage because you’ll pay high interest.
3. Increased repayment duration
When your financial situation changes due to a temporary loss of income, you can ask your dealer to increase your repayment period. For instance, you lost your job but got a better one three months later. Despite getting a new job, paying your outstanding plus current car installments upfront will strain your net income.
You can approach your dealership and request them to move your missed payments to the end of your repayment period. Doing this helps you to pay subsequent payments on time and retain your car.
4. Allow partial car payments
If you’ve lost your job or going through a period of low sales you can use your savings to pay your car monthly payments while working to improve your financial position. The good news is that you can reach out to your dealership and explain your situation.
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You can avoid late payment fines by paying half of your car payments until your sales improve. The dealer will, later on, adjust your next installments by adding the outstanding balances. If you usually pay $550 but the dealership allowed you to pay $275 in June and July, then you have a balance of $550.
Once your situation improves, the dealer will split your outstanding balance and spread it to your next installments. So, that means you’ll pay $775 in August and September. Then you’ll resume to paying $550 for the rest of your repayment period.
Both buyer and seller lose in this situation. The dealer will not refund your down payment or any portion of your car installments. Why? Because the call will fetch a lower resale value due to depreciation.
4. Three situations that allow you to get in-house car financing
1. When you have an insufficient credit history
If you’re in college and usually prefer paying cash for your expenses instead of using credit cards, then you most likely have an insufficient credit history. Even though there are car buying programs for college students, the vehicles available sometimes aren’t appealing.
On the other hand, in-house financing gives you a variety of cars that match your budget and income. So, that means you won’t have to settle for that subcompact car with a bad color.
2. When bad credit auto loans are too expensive
Did you know you can get car financing if you have a credit score of 550? A bad credit car loan has a tough set of requirements that discourage some potential buyers from applying. For instance, a 50% down payment.
Due to competition, some car dealerships allow buyers to pay 40% of the price upfront. Someone who’s in urgent need of a car will find in-house car financing as the better option.
3. When you’re planning to borrow a huge loan
Banks usually check applicants’ credit histories to see the number of current debts. They also view how many credit lenders have performed queries on your report within the past thirty days. It’s inadvisable to borrow a bank loan right after getting an auto loan.
Since some dealerships don’t deal with credit reference bureaus, you’ll get car financing without hard inquiries appearing on your credit report.
5. What are the advantages?
1. A wide variety of high-quality cars
If you take enough time to look for a good dealership, you’ll have access to cars with the latest features. Plus, you’re guaranteed of decent quality because dealerships do thorough inspections on cars for sale. Buyers who have subprime credit ratings and earn more than $5,000 a month can get brand new cars at buy here pay here dealerships.
2. Highly accessible
Car dealership financing involves minimum paperwork because third parties aren’t involved. That’s why you won’t need your credit report when filling the car financing forms. You can gather all the paperwork in less than a week. However, getting a bad credit car loan takes much longer because one has to look for a willing co-signer.
3. Swift process
A dealership hands over the car keys when they confirm that you’ve met their requirements. You can drive home just two hours after visiting the dealership. If you need a car urgently but only have 40-50% of the price, in-house financing is the better option.
6. What are the disadvantages
1. High risk of getting an upside-down loan
What’s an upside-down loan? It’s whereby credit financing exceeds the value of an asset. If, for instance, you get into a bad car accident just two months after getting a car loan, you risk getting into an underwater loan. Why? Because the car has lost 40% of its value to the accident.
Let’s assume that your car’s original value is $25,000 and the car financing is worth $18,000. Due to the accident, your car’s value drops to $15,000. Now, the credit financing ($18,000) exceeds your car’s current value ($15,000) by $3,000. Is that bad? Yes, it is, because you’ll spend more money than you should to repay the loan.
2. No improvement on your credit score
Car dealership financing doesn’t involve any credit reference bureaus except in one situation. Car buyers who default on their loans end up appearing on credit reference blacklists. If you’ve just come out of debt settlement and desperately need a credit score boost, in-house car financing won’t help you.
3. Exploitative tendencies
Car dealership financing is popular because there aren’t any credit checks. However, some sellers take advantage of buyers by imposing very high-interest rates. Since a buyer with terrible credit ratings has very limited options, he or she endures costly car payments.
On top of that, the dealership sets expensive late payment fines. By the time a buyer clears their loan, they feel drained to the point of regretting their car purchase.
4. One has to do a lot of window shopping
Since each dealership has its own terms and conditions, it is wrong to just settle for the first car financing deal you come across. Some car sellers limit buyers interested in dealership financing to a certain amount. That might force you to buy a car you don’t really like.
You’ll have to spend most of your weekends driving from one dealership to the next comparing interest rates.
5. Hidden charges
If you visit several online car forums, you’ll read several accounts of car buyers who encountered hidden charges just as they were about to clear their dealership car loans. Some had to borrow money elsewhere in order to receive their car titles.
You might encounter hidden administration and handling fees that can get as high as $1,000. If not administration, then it’s inspection costs.
6. No warranties
Car warranties help vehicle owners minimize repair and maintenance costs. Especially for high-end cars because it’s expensive to purchase genuine spare parts and pay for repairs. Despite getting subjected to expensive car monthly payments, none of these costs covers your auto warranty.
If you get car dealership financing, be prepared to meet your own repair expenses.
7. Harassment due to late or skipped payments
Car dealership staff will call your phone constantly when you miss your payment date. You won’t like the abrasive tone used by the debt collection staff. If you’re in a meeting and can’t answer phone calls, you’ll receive several text messages that can ruin your day.
If a buyer doesn’t pay up, the dealership immobilizes the car using an online tracking system. Imagine how embarrassing it would be if you’ve just refilled your gas tank but the car won’t start due to late payments.
7. How to improve your chances of getting in-house car financing with No Credit
1. Have a definite budget
Failing to plan is planning to fail. If you’re planning to pay $500 per month in car installments, you should think about cars that are available within a certain price range. You’ll need to visit a few dealerships and ask for recommendations.
Budgeting also enables you to create a savings goal for your car down payment.
2. Always use a car loan calculator
A car loan calculator helps you to work out monthly payments. You need it when budgeting for a car loan in order to determine how much cash deposit you need to get affordable monthly installments. It also helps you to determine your car monthly payments when doing a trade-in.
3. Save up at least 40%
The higher your down payment, the lower your outstanding balance. Since car dealership financing has high-interest rates, you can reduce this financial burden by saving up a significant cash deposit. If you pay at least 40% of the car’s price upfront, you’ll be able to clear your loan within a short repayment period.
4. Shop during the end of the month
Just like most businesses, car dealerships also have end-of-month offers. Dealerships use this offers to attract both cash and credit buyers because it’s during this period that employees receive their salaries. Doing this helps to reduce the principle of your car financing loan.
5. Don’t tell the dealership you want financing during price negotiations
Bargaining for a good price lowers your monthly payments by reducing the loan’s principle. You should negotiate for a better price even if you need car dealership financing. Informing the dealership about your need for financing before or during price negotiations causes them to adopt a rigid stand. Why? Because they make more profit when the buyer has a higher principle to repay.
8. What are the alternatives to car dealership financing?
1. Save for a low-priced car
If you’re not in a financial position to consistently make car payments, you should consider a cash purchase. It’s safe because you only need to save a portion of your monthly income consistently for a specified period. Plus, you don’t put your credit history or ratings at risk.
You may consider getting a brand new subcompact car or a used sedan as long as you’ve done a thorough inspection.
2. Raise your credit score to 550
The lowest credit score you need to obtain a bad credit auto loan is 550. In addition to owning a decent car, each car monthly payment boosts your credit ratings. You might need a couple of years or less to improve your ratings by getting and repaying secured debts. Why? Because significant improvements appear after every six months.
3. Approach private sellers
Do you have a friend or relative who’s selling their car? One advantage about private sellers is that you don’t have to show up with the entire amount. Since you already have a good relationship and mutual respect, your friend or cousin can agree to a down payment and arrange an installment plan.
You also don’t pay any interest rates or late payment fines. However, you shouldn’t take advantage of your friendship to slack on car installments.
4. Staff car loans
Does the organization you work for provide staff car loans? When you compare a staff car loan with car dealership financing, you’ll notice how much money you get to save with your employer. Applying for a staff car loan takes lesser requirements and you actually have access to brand new cars.
5. Reach out to family and friends
Buyers interested in cash purchases can reach out to family and friends for a little financial support. This form of credit has no interest charges and comes with nice repayment periods. Just make sure you save at least half of your car’s price because you’ll still have insurance and maintenance costs to think about when repaying your relatives.
9. Avoid these three mistakes when seeking in-house financing with no credit check
1. Buying a rebuilt title car
A rebuilt title is a car that’s been restored to life after losing more than 50% of its value to an accident. Most of rebuilt title cars tend to have recurring mechanical problems that the owner has to sort out from his or her own pockets. Plus, it’s easy to end up with an upside-down loan because rebuilt title cars have very low values.
2. Failing to inspect a used car you’re about to buy
You need an experienced keen eye to inspect a used car for sale that you’re eyeing. Since car dealership financing lacks warranties, it’s up to you to find a decent car that has an excellent engine. That’s why you need someone who’s experienced with cars to accompany you to the dealership.
3. Agreeing to car dealership insurance deals
Some car dealerships also have insurance forms on standby so that buyers get everything sorted out under one roof. However, this insurance plan is costly because the dealership gets a commission from each monthly payment you make.
Avoid such expenses by getting your own auto insurance coverage.
10. Winding it up
Car dealership financing is a good option for college students who need cars but lack sufficient credit histories to buy the cars they want. If you have multiple issues with previous creditors, it might be hard to get an auto loan from the bank due to poor credit ratings. However, you can still buy a car without affecting your credit score by getting in-house car financing.
On the other hand, car dealership financing can turn into an upside-down loan due to the high interest rates involved.
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