It can be difficult to find a car loan if you’ve had credit problems — but not impossible. The fact of the matter is you can almost always find somebody willing to loan you money to buy a car.
In fact, an entire sub-genre of lender has emerged for just that purpose. Known as “buy here, pay here” lenders, they’ll sell you a car and finance it too. However, while you can indeed get a car that way, there are a number of reasons why “buy here, pay here” is a bad idea.
Let’s take a look at some of them.
1. It’s More Expensive
In a marketplace in which a buyer with excellent credit can get a used car loan at 4.18 percent and a buyer with very poor credit will be looking at 14.55 percent from mainstream lenders, some “buy here, pay here” lenders tout their ability to provide loans at 15 percent. While that doesn’t seem like that much more when you compare it to 14.55, it can add up to a pretty significant amount on a $30,000 loan over five, six or seven years. Keep in mind too, that 15 percent is an exception rather than the rule. Rates of up to 20 percent or more are common among “buy here, pay here” lenders.
2. You’ll Owe More Than the Car Is Worth
Conventional lenders are usually careful to avoid letting borrowers get in over their heads. “Buy here, pay here” lenders make more money if you do. With the exceptionally high rates of interest they charge, you’re almost guaranteed to pay far more than the car is worth when you’ve paid off the loan. Further, shoppers at “buy here, pay here” lots tend to be less aggressive when it comes to negotiating pricing because they feel like the dealer is doing them a favor selling the car in the first place. This means they often pay a higher price before the finance charges are even applied to the transaction. All of this can mean owing more than the car’s fair market value. Further, if you default, the lender will repossess the car and sell it again.
3. No Benefit to Your Credit Score
Your payment history is conveyed to the credit reporting agencies when you get an auto loan from a conventional lender. Handle the loan responsibly and you’ll see an uptick in your credit score as a result. However, many “buy here, pay here” lenders do not report to the credit agencies. After all, it serves as no advantage to them to do so. Think about it; if you make all your payments on time and see no appreciable increase in your credit score you’ll probably still be stuck on the “buy here, pay here” treadmill when you need to get another car at a later date.
4. Sacrificing Your Privacy
One of the reasons “buy here, pay here” dealers feel so comfortable selling cars to anyone and everyone is they equip them with tracking devices. This gives the dealer the ability to locate the car at any time — which means they know where you go, when you go, how often you go and how long you stay. What’s more, these devices afford the seller the capability of sounding an alarm inside the car when your payment is late. And, they can even use it to disable the car if you miss a payment altogether.
So, while the “buy here, pay here” car dealer might come across as this benevolent businessperson helping the most vulnerable consumers get transportation, they do have a dark side. And, that dark side, as evidenced in the examples above, is why “buy here, pay here” is a bad idea.