Dealerships that offer in-house financing are often called "buy here, pay here" dealerships. They can be a great option for drivers looking to buy a vehicle when their credit score is low, but financing a car purchase through a dealership might cost more in the long run. Keep in mind, "buy here, pay here" dealerships typically only sell older and lower-value used vehicles that may be more expensive to maintain.
In most cases, getting an auto loan for your vehicle through in-house financing should be your last resort. What you get in convenience, you pay for in exorbitant interest rates, hidden markup fees, and strict terms and penalties. At worst, you might even be signing onto a scam that'll keep you underwater for years.
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If possible, check out your other options, such as direct financing or dealer-assisted financing. You might even hold off on purchasing a car until these other options become available to you. However, if finding an alternative lender simply isn't an option or you've crunched the numbers and determined it's the best plan for you, we can help you identify some red flags and pitfalls to avoid before finalizing your contract.
Use this guide to learn everything you need to know about in-house financing dealerships. We'll explain what in-house financing dealerships are, how they work, the pros and cons of using them, and what alternatives to consider before you sign.
What Are In-House Financing Dealerships?
An in-house financing dealership is a car dealership that lets buyers finance their vehicle from the same place they make the purchase. This can make your car buying experience more convenient because it means you handle everything in one place.
You get to skip the hassle of waiting for approval from a bank, credit union, or another lender, which is great for those who value their time or feel less than confident in their credit scores.
How Do In-House Financing Dealerships Work?
In-house financing dealerships work similarly to other types of lenders. You meet with one of the dealership's in-house financing professionals and apply for a loan. Once the dealership determines what loan amount you qualify for, they will show you vehicles in that price range on their lot. Once you select a vehicle, you make payments directly to the dealership for the car plus the agreed interest.
Keep in mind that the dealership wants to get paid for the time it put into arranging your financing package. Plus, if your credit record is shaky or nonexistent, the dealership is likely to slap on even higher interest rates or harsh penalties to make sure they get their money back. Added to this, some dealerships may actually loan you more money than your car is worth, meaning you'll end up paying back the money you didn't need, plus interest.
Pros of In-House Financing Dealerships
Before you jump to conclusions about overpaying on your car loan, it's important to look at the pros of in-house financing dealerships. Here are some advantages you can expect from this type of financing:
Convenience
If you need a car fast and don't have time to mess around with stuffy bankers and rejected auto loan applications, in-house financing might be for you. When you buy and finance your car from the same institution, it saves you from running around town and shopping for third-party providers.
Don't misunderstand—you should still do your homework and compare your financing package options from multiple lenders before signing on, but the process may be faster when you finance your vehicle at the dealership.
A dealership knows the value of its vehicles, which can make the approval process faster. Plus, in-house financing allows you to submit your application, get approved, and drive off the lot all in one visit. In comparison, it can take days to get your money through a third-party lender, even if they offer instant application approvals.
Easier to Qualify
It can be easier to qualify for a loan through an in-house financing dealership. They may offer more flexibility to buyers with poor credit than other lenders. For example, if you can't get a loan to buy a car because your application keeps getting rejected, going through an in-house dealership might be your next step.
Many in-house financing dealerships specialize in providing loan packages to buyers with poor and even no credit. Some won't even look at your score when you apply.
Opportunity to Build Credit
It's possible to improve your credit by going through an in-house financing dealership. However, if you're looking to build your credit through in-house financing, make sure the dealership actually reports your loan activity to a national credit bureau. Not all dealerships will, so do your research if building credit is one of your goals.
Improving your credit score can make it easier to get approved for future loans, and it can reduce your interest rates. You may even refinance your car loan in a year to get a better rate through the dealership.
Cons of In-House Financing Dealerships
Of course, there are downsides to in-house financing dealerships. Here are some cons to consider:
Higher Interest Rates
If you finance through an in-house dealership, you're probably going to pay more than financing through a bank or another lender. For most people, getting in-house financing is the last resort. Not only are you going to pay more in interest than you would through a third party, but you might also suffer additional fees and penalties.
Often, these dealerships charge the highest interest rates possible. They might also tack on markup fees that they may be under no legal obligation to disclose and that can be hard for consumers to spot.
Narrow Selection
You can only use in-house financing to purchase a car from the dealership. This means you're unlikely to get the best deal on your vehicle of choice.
You can't get in-house financing for a car you buy from an off-lot source, such as from a private seller or another dealer. If you absolutely must get in-house financing, you're limited to purchasing a vehicle through a dealership that offers it.
Potential Scams and Harsh Penalties
Some dealerships prey on buyers with bad credit, particularly those who feel like they have no other options. Sure, they'll approve your application and hand over the keys to your vehicle all in the same day, but not without charging high interest rates and imposing harsh penalties for late payments.
Some may require weekly or bi-weekly payments and even install tracking devices or devices that can disable your car. These tactics allow them to find and repossess your vehicle or make it inoperable if you miss a payment. If you're considering in-house financing, be conscious of the fine print.
What Are My Other Options?
Always check out your other options before sealing the deal through an in-house financing dealership. Here are some alternatives to consider so you can choose where to get a car loan:
Direct Financing
When you finance your purchase directly from a third-party lender, you can avoid the pitfalls of working with the dealership's financing team. With this option, you apply for a loan through a bank, credit union, online lender, or another third-party loan provider. They'll approve you for a loan up to a defined dollar amount, and you can use that money to buy a car from any dealership or private seller of your choosing.
While banks are more selective about who they work with, most credit unions are flexible and will work with buyers who have credit issues. Remember, these lenders are selling you a loan, not a car. They only profit if you pay back your loan, so it's in their best interest to only loan you the money you can afford to pay back.
Dealer-Assisted Financing
When you use dealer-assisted financing, the dealer shops for loan options for you through alternative lenders. You won't have to go out of your way to get preapprovals from a variety of lenders on your own, but you will be at the mercy of the dealership and its lending partners.
You might still face markup fees to cover the cost of convenience, and your vehicle selection is limited to what the dealership sells. However, if you have good credit, you'll probably qualify for a better interest rate with this option than you would through in-house financing.
For most buyers, getting an auto loan through in-house financing should be a last resort. However, finding an alternative lender isn't an option for everyone. Do your research if you need to pursue an in-house financing dealership. Choose a reputable dealer, read the fine print, and be aware of potential scams to protect yourself and your investment.
Jim Slavik
Finance Editor
Jim Slavik is a financial services expert with 30 years of strategic and operational experience including leading underwriting, loan administration, customer service and collections. He has held C-suite credit operations roles for Fortune 100 and private equity companies for credit cards, personal loans, lease-to-own, auto loans, mortgages, and insurance for prime and sub-prime borrowers.
Currently Mr. Slavik is an independent financial services consultant for private equity firms and a contributor for expert networks such as GLG, Guidepoint, and Level company amongst others.
