There is no doubt that the volume of vehicles sold off of buy here pay here car lots is on the rise. In 2001, buy here pay here auto sales totaled about 1.2 million units, accounting for about 4.1{27e8b423779a20fcbf3b0e5b78622daa9462ccff634cf59ab338bb6c41129d17} of all dealer sales. Sales 10 years later paint a very different picture of the used car market. The number of buy here pay here, or BHPH, vehicles sold is estimated to reach nearly 2.4 million, accounting for 8.6{27e8b423779a20fcbf3b0e5b78622daa9462ccff634cf59ab338bb6c41129d17} of all used car dealer sales – more than doubling its market share.
This staggering increase in the BHPH sales begs the question: what market forces are causing this change, and is it good for the American consumer?
If you don’t already know, buy here pay here car dealers differ from traditional franchise car dealerships in significant ways. The most salient difference involves the way financing is carried out. A conventional dealership relies on off-site, third-party finance institutions to approve financing for customers. These institutions may include automaker-affiliated finance companies like Ford Auto Credit, national and local banks, credit unions, and specialized auto finance companies. However, the problem lies in getting approved. Most third-party lending institutions are loath to extend credit to people with subprime or deep subprime credit scores. This has become increasingly true during the economic recession our country has been experiencing. To make things more difficult for car buyers and dealers who want them approved so they can sell cars, the troubled economy has taken its toll on the average credit score of American borrowers. People have been losing their jobs, missing bill payments, and in total decreasing their credit scores.
That said, people still need to buy cars and dealers need to sell them. Buy here pay here car dealerships offer financing in-house and on-site, contrary to a conventional dealership. The in-house nature of this arrangement allows them greater freedom to approve financing for people who have credit scores below 600 to 620. This is as appealing to the dealers as it is today car buyer, as it is in the best interest of both parties to move the metal, so to speak. These in-house financing car dealers can be identified by the advertising slogans they employ, such as we finance, we tote the note, buy here pay here, and your job is your credit. Even traditionally conventional dealerships have been exploring the BHPH arena, as the profit margins are higher and they can sell cars to greater spectrum of buyers from a credit perspective.
There is a downside, however, to buy here pay here car sales. In fact there were several downsides, including exorbitant rates of interest, high minimum down payments, well used inventory, absence of factory warranties, and frequency of payments. These are, of course, disadvantages for the buyer and not the dealer. They are largely methods of reducing the risk of granting credit to high risk applicants on the part of the dealer.
These disadvantages make buy here pay here financing a method of final resort for car shoppers who cannot be proved via the traditional channels due to credit problems, bankruptcy, foreclosure, or a record of repayment delinquency.
