What Are In-House Financing Car Lots?
In-house financing is when a car dealership offers financing directly to customers instead of working with outside financial institutions, like banks or credit unions. In other words, you can get your auto loan from the same dealer that sells you your car. While the auto industry is known for offering in-house financing, it might not be the only option for credit-challenged buyers — and they’re usually not the best option either.
Here’s what you need to know about in-house financing car dealerships:
How in-house financing car lots work
In-house financing works by applying for your auto loan on site, through the dealership. Commonly referred to as “buy here, pay here” auto loans, this type of financing means that you’ll buy the car and take out your loan from the same company.
This kind of financing can be risky. While on-site lenders may approve borrowers with poor credit, the borrower may be penalized with much higher interest rates and fees than those from a bank or credit union. The dealership may also lend you more money than the car is worth, which means you’ll be underwater before even starting the ignition.
But even if you have poor or no credit, in-house financing isn’t the only way to go about buying a car. Banks and credit unions may offer preapproval for auto loans, which you can then use to find a car that’s affordable based on your loan amount.
The pros and cons of in-house financing
In-house financing can be convenient, but make sure to weigh the disadvantages before taking on in-house financing for an auto loan:
Pros
Fast approval: Many auto lenders, including banks and online lenders, offer quick loan approval — but even with instant approval it could still take several days to receive your loan funds. By comparison, the process from application to funding with an in-house dealer can be easier and faster, with buyers receiving their loans and completing their purchases all in one visit.
Approval for bad credit: In-house financing dealerships tend to specialize in loans for bad credit, and some don’t even look at your credit when you apply. If you’ve been denied by other lenders or tried applying with a cosigner, but you still can’t get approved, in-house financing might be your next option.
Cons
High rates: Many in-house financing dealerships charge the highest interest rates allowed in their states, and some even charge as much as 300% or higher.
Strict terms and penalties: For borrowers with bad credit, in-house financing may require you to make a larger down payment, or even have a device installed that disables your car if you miss your payment. Borrowers also have a higher chance of repossession with these types of loans.
Limited selection: Dealer financing can only be used to buy cars sold by the dealership. Going this route could mean missing out on a better price for the same car if you searched online, went to a different dealership or bought your car from a private seller.
Might not improve credit: Some in-house auto lenders won’t report loan activity to the credit bureaus. If you go through one of these lenders, your on-time loan payments will not help improve your credit scores.
Alternatives to in-house financing
In-house financing car lots may be convenient, but they’re not the only way to get a loan — even if you have bad credit. Here are some other options to consider:
Direct financing
One way to get a car loan is through direct financing. With this option, you’ll go to a bank, a credit union or even an online lender for your loan.
With direct financing, you’ll be approved for a loan up to a set dollar amount. The loan can then be used to buy a car from any dealership or even a private party, as long as you find a car that fits the lender’s specifications (such as age and mileage limits).
Direct financing through credit unions can be a great option for buyers with credit issues, as they may be more willing to work with you. As an added benefit, direct financing gives you a limit on what you can borrow based on what the lender deems is affordable for you. Having a set limit can help you stick within your budget when shopping for a car, making it easier to say no to dealers’ sales pitches and tempting add-ons.
Dealer financing
With dealer financing, the dealership does the work to find you a loan. You’ll still shop for your car at the dealer’s lot, but you’ll only fill out one loan application that the dealership will submit to several lenders on your behalf.
Still, while this option might be better than “buy here, pay here” financing, you’ll face some of the same drawbacks: You’ll likely be charged a mark-up by the dealership, and your car selection will be limited. On the upside, borrowers with good credit may be able to get promotional financing for new cars through a dealership and some even offer 0% APR loans.
Hold off on your purchase (if you can)
If you’re in a position to delay your car purchase, you’ll want to seriously consider waiting rather than getting an in-house financed loan.
By taking time to improve your credit, save more money for a down payment, look for a cosigner or simply shop around elsewhere, you could put yourself in a position to get a better loan. Ultimately, getting a better loan means saving money and reducing the risk of repossession or other financial problems associated with in-house financing.
What to know if you get in-house financing for your car
Taking on a car loan is a big financial commitment. If you do decide to seek in-house financing, here are some things you can do to make sure you get the best deal:
- Get several rate quotes. Even if you’re in a hurry, you can get instant loan approvals online and use them to compare against in-house loans, or even show them to dealers to help you negotiate for better rates.
- Research vehicle prices. If you find a car you like at a “buy here pay here” lot, be sure to look online or at other lots to see if the car is priced fairly. This research could help you negotiate a lower price, or you may end up going elsewhere for a better deal.
- Review your loan terms. When a dealership offers you a loan, don’t just focus on the monthly payment. Take a look at the annual percentage rate (APR) — which is a more accurate reflection of your total costs — and make sure you understand all of the fees involved. If it seems like a bad deal, leave the dealership and take some time to think about it before signing.
- Ask about credit reporting. Ask the dealership if they report your loan activity to the national credit bureaus (Equifax, Experian and TransUnion). If you’re hoping to improve your credit, you may want to skip a dealership that does not report to these agencies.
Don’t be fooled by long terms
Is your lender offering you an extra-long repayment time frame? This tactic is often used to make an expensive loan seem affordable. By stretching out the payment term, the monthly cost goes down and makes the loan seem more budget-friendly.
But a longer repayment term means paying a lot more money down the line. Consider, for example, the difference between a 3-year repayment and a 6-year repayment on a $20,000 loan (at 4.95% APR). With the six year term, the monthly payment is $277 lower ($320 versus $597). However, with interest fees of $3,024, you’d end up being charged an extra $1,526 more than the 3-year term’s $1,498 — more than twice as much.
Frequently asked questions about in-house financing
How do I find in-house financing near me?
Finding an in-house auto lender can be as easy as doing an online search. If you find several options to choose from in your area, consider reading buyer reviews on Yelp, checking out Google Reviews or using a dealership review website to help you find the most reputable dealer.
Does in-house financing improve my credit?
Not necessarily. In-house financing lenders don’t always report loans to the credit bureaus. So if your lender doesn’t report to any of the national credit bureaus, your credit won’t be impacted by your auto loan.
Is in-house financing right for me?
In-house financing should be your last choice for lending. If your loan applications have been denied by reputable lenders such as banks and credit unions, and you can’t wait for an auto loan — or find any alternative to help you buy a car — you may want to shop around for an in-house financing loan.