Difference between buy here pay here and traditional financing?

At Auto Mart in Las Vegas, we specialize in selling customers with bad credit great used cars. These customers have been to 4-5 different dealers on average before finding us. These dealers have all told them no and they assume that buy here pay here is the only way they can get financed. Not only is it not true, it's usually the exact opposite of that.

Let me explain what buy here pay here or in house financing is first. It's when the dealership becomes their own bank and finances the car for you. The alternative is dealers that primarily use finance companies and banks that then carry the loan and handle the finances. Financially, the difference for the dealership itself is pretty big, Finance company based dealerships are primarily focused on selling cars, buy here pay here dealers are focused more on the collection aspects of the cars they have sold.

The first difference in the two is the down payment. Low down payments are usually the hot button with customers with bad credit. Buy here pay here requires larger down payments because the dealer needs to offset their risk. Typically, dealers buy cheaper cars for this kind of model and try and get enough down payment to cover the cost of the vehicle and your payments are their profit for the most part.

Going with a dealer using banks usually means lower down payments. The banks are assuming the risk and have massive portfolios. They are competing with dozens of other banks for the same deals and will be very aggressive in this competition. This is how dealers can do low down payments.

The next huge difference is in the quality of cars. The typical dealer with in house financing has an average inventory cost of $1,000 to $5,000 cars. Your down payment of $3,000 means you can finance a car they paid $3,000 for. This means cheaper, older, higher mileage cars. Also, a lot of buy here pay here lots use frame damage or salvage title vehicles to buy nicer cars at a lower price since there is no bank oversight.

Dealers that finance used cars to customers with bad credit usually have an average inventory cost of closer to $8,000 and the down payment doesn't affect which car you can buy, only your income does. Banks also will not finance salvage, frame or flood vehicles, or cars with excessive miles. This protects you.

A huge difference is cost. If the dealer going through banks pays $8,000 for a car worth $10,000, you will pay close to $10,000, or what the vehicle is worth. The bank will protect themselves by not allowing a larger loan so that if the car repossesses, they can offset their losses. At a buy here pay here lot, if the dealer paid $1,500, they can charge you... well anything. Typically, they figure out what you can afford and make you pay that for 3 or 4 years. You pay thousands of dollars more.

The last major difference is your credit. A bank will report your loan to all three major bureaus and build your credit. A car loan is one of the quickest ways to repair your credit. With a buy here pay here situation, the dealer actually has to pay more to report it to your credit. The majority of these dealers do not report.

The difference is pretty obvious. The question you may ask is why some dealers choose one over the other. A good reason is money. It takes more money to run a dealership using banks because the cars are much more expensive. It also makes less per car sold but you make up for it at volume. Another reason is how the owner perceives their dealership: do they want to focus on sales or collecting money? Buy here pay here is typically better profit wise in the long run and safer, but a dealer going through banks has a much larger opportunity to grow in the future.

At Auto Mart, we use banks for almost every one of our customers. Not only do we feel that it's ethically better for our customers, it's the way we've done business for 15 years.