In the automotive sales industry, traditional car dealerships typically work with third-party lenders, such as banks or credit unions, to finance vehicle purchases for their customers. However, not everyone qualifies for these loans, often due to poor credit history or lack of sufficient income. This is where Buy Here Pay Here (BHPH) dealerships come into play.
Buy Here Pay Here dealerships offer in-house financing, allowing customers to purchase vehicles directly from the dealer and make payments to the same dealer, bypassing the need for third-party financial institutions. In this article, we'll explore what Buy Here Pay Here dealerships are, how they operate, the benefits and drawbacks for both dealers and buyers, and how to start your own BHPH dealership.
What is a Buy Here Pay Here Dealership?
A Buy Here Pay Here (BHPH) dealership is a type of car dealership that provides in-house financing to customers. Instead of using a traditional lender, the dealership itself acts as the financier. This business model is designed to cater to individuals with poor or no credit history who may have difficulty securing an auto loan through conventional means. At a BHPH dealership, the buyer purchases the vehicle and makes all loan payments directly to the dealer, hence the name "Buy Here Pay Here."
How BHPH Dealerships Work
BHPH dealerships differ significantly from traditional car dealerships in the following ways:
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In-House Financing: Instead of arranging financing through banks or credit unions, BHPH dealers handle all aspects of financing within their dealership. The dealer assesses the buyer's creditworthiness, sets the loan terms, and collects payments.
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No Credit or Bad Credit: BHPH dealerships specialize in working with customers who have no credit or bad credit. They focus more on the buyer's ability to make payments rather than their credit score. This opens opportunities for individuals who might otherwise struggle to get approved for an auto loan.
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Higher Interest Rates: Since BHPH dealerships are taking on more risk by financing customers with poor credit, they typically charge higher interest rates compared to traditional lenders. This is to offset the potential risk of default.
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Frequent Payments: Unlike traditional loans that may require monthly payments, BHPH loans often require weekly or bi-weekly payments. This can help the dealer stay in closer contact with the buyer and ensure that payments are made regularly.
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Older or High-Mileage Vehicles: BHPH dealerships often stock older or higher-mileage vehicles compared to traditional dealerships. These vehicles are generally more affordable, making them more accessible to customers with limited financial means.
Pros and Cons of Buy Here Pay Here Dealerships
While BHPH dealerships provide valuable services to customers who have limited financing options, the business model comes with its own set of advantages and disadvantages.
Benefits for Buyers
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Access to Financing: For individuals with poor or no credit, BHPH dealerships offer a chance to finance a vehicle when traditional lenders won’t.
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Fast Approval: BHPH dealerships typically have more lenient approval processes, allowing customers to secure financing and drive away with a vehicle on the same day.
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Rebuild Credit: Some BHPH dealerships report payment histories to credit bureaus. This gives customers an opportunity to rebuild their credit by making regular, on-time payments.
Drawbacks for Buyers
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Higher Interest Rates: Due to the higher risk associated with financing customers with poor credit, BHPH dealerships often charge significantly higher interest rates, resulting in more expensive loans over time.
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Limited Vehicle Selection: BHPH dealerships may not offer the same variety or quality of vehicles as traditional dealerships. Buyers may have to settle for older or higher-mileage vehicles.
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Frequent Payment Schedules: BHPH loans often require more frequent payments, which can be a challenge for some buyers to keep up with.
Benefits for Dealers
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Access to a Larger Market: BHPH dealerships can serve a broader range of customers, particularly those who are underserved by traditional car dealerships and lenders.
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Profit from Financing: In addition to making a profit from vehicle sales, BHPH dealerships also profit from financing. Higher interest rates mean that dealers can earn significant returns on the loans they provide.
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Customer Retention: Since payments are made directly to the dealer, BHPH dealerships maintain closer relationships with their customers, which can help with customer retention and brand loyalty.
Drawbacks for Dealers
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Risk of Default: Financing customers with poor credit increases the risk of loan defaults. BHPH dealers must be prepared to handle delinquencies and potential repossessions.
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Operational Costs: Managing in-house financing requires additional resources, including collections, loan management, and repossession processes.
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Reputation: BHPH dealerships can sometimes earn a negative reputation for predatory lending practices, high interest rates, and repossession policies. Dealers must work to maintain transparency and ethical business practices.
Starting a Buy Here Pay Here Dealership
Starting a Buy Here Pay Here dealership can be a lucrative business venture, but it requires careful planning and a solid understanding of both the automotive sales industry and the in-house financing model. Here are the key steps involved in launching your own BHPH dealership:
1. Conduct Market Research
Before starting a BHPH dealership, it’s essential to research the local market. Identify the demand for in-house financing and assess the competition. Look into demographic data, including the percentage of individuals with poor credit in your area, to gauge the potential customer base. Understanding the needs and preferences of your target market will help you determine the types of vehicles and financing options to offer.
2. Create a Business Plan
A well-structured business plan is crucial for the success of any dealership. Your business plan should outline your dealership’s goals, target market, inventory strategy, and financing model. Include detailed financial projections, including startup costs, operating expenses, and expected revenues from both vehicle sales and financing.
3. Secure Financing for Your Dealership
Starting a BHPH dealership requires substantial capital to purchase inventory, cover operating costs, and finance customer loans. You may need to secure funding from investors, business loans, or a line of credit. Keep in mind that you’ll also need enough liquidity to manage the financing side of the business, as customers will make payments over time rather than upfront.
4. Obtain Necessary Licenses and Permits
Every state has different regulations regarding auto dealerships, so it’s important to research the specific requirements in your area. You’ll likely need a dealership license, sales tax permit, and possibly a finance license to operate as a BHPH dealership. Make sure to comply with all legal requirements to avoid penalties or legal issues down the line.
5. Establish a Reliable Inventory Supply
To attract customers, you’ll need a diverse and reliable inventory of vehicles. Many BHPH dealerships focus on affordable used cars with a wide price range to appeal to a broader audience. Establish relationships with wholesalers, auctions, and other dealers to ensure a steady supply of vehicles for your lot.
6. Develop an In-House Financing System
One of the most critical aspects of running a BHPH dealership is setting up your in-house financing system. You’ll need software to manage loan applications, track payments, and generate reports. It’s also important to establish policies for loan terms, down payments, interest rates, and repossessions.
7. Build a Collections Process
Since you’ll be handling financing in-house, you’ll need to develop an efficient collections process to ensure timely payments from customers. This includes setting up payment schedules, sending reminders, and handling delinquent accounts. It’s also a good idea to work with a legal professional to draft contracts that clearly outline the terms and conditions of your loans.
8. Promote Your Dealership
Marketing is key to attracting customers to your BHPH dealership. Use both traditional and digital marketing strategies to promote your services. Consider running ads on social media platforms, offering special promotions, and creating a user-friendly website where customers can browse inventory and apply for financing.
Buy Here Pay Here dealerships offer a valuable service to customers with poor credit or limited financial options, while also providing a profitable business model for dealers. However, operating a BHPH dealership comes with unique challenges, including managing in-house financing, handling defaults, and maintaining ethical business practices. By carefully planning, conducting thorough research, and building strong relationships with customers, a BHPH dealership can be a successful and rewarding venture. Whether you’re considering buying a car from a BHPH dealer or starting your own dealership, understanding how the system works is essential for making informed decisions.
