Buying a car can be one of the largest purchases you’ll ever make in your life. And if you’re like most Canadians, you don’t have tens of thousands of dollars easily at hand, which means you’ll need some financing help. How you finance your car purchase can make a big difference in your overall experience and costs. One option that has gained popularity over the last few years is in-house financing (also sometimes called Buy Here Pay Here financing) offered by car dealerships.
This article will discuss what in-house financing is, explore how it compares to traditional bank loans and take a look at the benefits and drawbacks of choosing this type of financing.
What Is In-House Financing Car Dealerships?
In-house financing is when a car dealership essentially acts like a bank by lending you their own money to purchase the vehicle they just sold you. You then make periodic payments (usually with interest) back to the dealership until the loan is paid off. By borrowing the funds to pay for the car from the dealer, you don’t have to go to a bank to see if they’ll give you a loan.
How Does It Work?
Many well-known car brand dealerships in Canada, including Toyota, BMW, and Mercedes, offer their own in-house financing services. They will often have flexible financing terms, special offers, deals, and discounts to attract customers and encourage brand loyalty.
How it works is that once you decide on a car you want to buy, you’ll then be asked to fill out a credit application (which you can sometimes do ahead of time online) and provide similar details as you would with a bank (including information about your income, employment history and current debts).
The dealership’s finance department will then review your application and assess various factors such as your income, debt and credit score. Based on these factors, they will decide if they’re going to approve your loan, as well as the interest rate and terms they can offer you.
Once approved, you’ll then make your periodic payments directly to the dealership until it’s paid off in full.
In-House Financing Car Dealerships VS Bank Car Loan
Here’s an overview of the main similarities and differences between in-house and bank financing:
Similarities
- Both options will need you to apply for credit and provide things like proof of income and employment.
- Your credit file will likely be reviewed in both cases to determine your creditworthiness.
- Both loans will have an interest rate and repayment term that you’ll need to agree to.
- You’ll typically make monthly payments to repay the loan, whether it’s to the dealership or the bank.
Differences
- Banks and credit unions tend to have stricter requirements for loan approval, often requiring a higher credit score and more stable income and employment history than dealerships who may be more willing to offer a loan to those with bad credit.
- Dealerships may charge higher interest rates.
- In-house financing is usually a much faster process than getting a bank loan, which may need to be approved by several bank representatives.
Is In-House Financing Available For Used Cars?
Yes, in-house financing may be available for used cars, however, the dealer may impose conditions, such as only financing used cars under a certain age, like 10 years old. Limitations may be placed on a used car loan to avoid an upside-down car loan. This happens when your car loan exceeds the value of your car.
Older vehicles are more prone to repairs and maintenance, which can cause the car to lose much of its value. This increases the risk of the borrower defaulting on the loan while the car is worth less than the loan. This makes it difficult for the lender to recoup payment if they have to seize the car. As such, lenders often have limitations on financing for used cars.
Can You Get 0% Financing From A Car Dealership?
These days finding 0% financing (which means you get a loan without interest) from car dealerships is incredibly rare, mostly because it’s just not a buyer’s market right now. The ongoing vehicle shortages and high demand have shifted the market in favour of sellers, reducing the need for dealerships to offer attractive incentives like 0% APR to attract buyers.
That being said, it may still be possible to find 0% financing. However, if you do find 0% financing from a car dealership in Canada, you typically need to meet certain strict qualifications, such as a very high credit score. Moreover, interest-free financing will likely only be offered on select vehicles.
Also keep in mind that sometimes even if you do get a 0% financing offer, it may not always be the best deal overall. Interest-free financing is sometimes offered as an alternative to other incentives like cash back rebates, and taking the rebate instead of the 0% interest loan can sometimes work out better financially.
Can You Get In-House Financing With A Car Dealership If You Have Bad Credit?
The good news is that dealerships are more likely to work with those with bad credit than banks. For car buyers with bad credit, securing financing can be a challenge because traditional lenders like banks and credit unions are often reluctant to approve a loan application from a borrower with a low credit score or a history of missed payments.
Dealerships that offer in-house financing, on the other hand, are often more willing to work with borrowers who have less-than-perfect credit, as they have more flexibility in setting loan terms and approval requirements. Their goal is to sell you a car and so dealerships are more open to lending funds to those with a shaky credit history to increase the chance of selling a vehicle.
Keep in mind, however, that for those with bad credit, it’s important to carefully review the terms and interest rates, as they may be less favourable compared to traditional financing options.
Do Dealerships Report Your In-House Car Loan Payments?
When you take out a traditional car loan from a bank or credit union, your lender will typically report your loan payments to Canada’s two major credit bureaus. If you’re making your payments on time, this can be a huge perk as it can help you build up your credit score over time.
On the other hand, with in-house financing, whether or not your loan payments are reported will vary depending on the dealership. Some dealers do report loan payments to the credit bureaus, while others don’t. So it’s important to ask about their reporting practices before signing a loan agreement, if that’s important to you.
If a dealership does not report loan payments, your credit score will not be impacted by your payment history, either positively or negatively. If you know you’ll be able to manage your payments and want to improve your credit score, you may want to ensure you get a dealer that will report your payments.
Benefits Of In-House Financing Car Dealerships
In-house financing offers several benefits for car buyers, including:
- Convenience. With in-house financing, you can handle the entire car buying process, from vehicle selection to financing, all in one place. This process tends to be much faster than getting a loan approved with a traditional bank or credit union.
- Easier approval process. Dealerships that offer in-house financing may have more flexible approval criteria than traditional lenders, making it easier for borrowers with poor credit to get approved for a car loan.
- Special offers. While banks typically offer lower interest rates than dealerships, it may be possible to get a low-rate deal or cash-back bonus in lieu of lower interest.
Drawbacks Of In-House Financing Car Dealerships
Here are some of the drawbacks of in-house financing:
- Higher interest rates. Dealerships will often have higher interest rates compared to traditional bank loans or credit unions, especially for borrowers with lower credit scores.
- Hard to get deals. Special interest financing may only be available for new cars and it can be exceptionally hard to qualify for 0% financing offers.
- Terms: Not only are dealerships likely to charge a higher interest rate than banks but the repayment contracts may also have less favorable terms.
- Credit reporting. Some dealerships may not report loan payments to Canada’s credit bureaus, which means your on-time payments will not help improve your score.
Conclusion
In-house financing from car dealerships can be a fast, easy and convenient way to get financing for your car purchase. This is especially true for people who might otherwise not get approved by a bank which tends to have a slower loan process and are less likely to approve those with a history of poor credit and missed payments.
Ultimately, it’s important to carefully review the terms of both options, consider your financial situation, and shop around for the best rates before deciding between bank financing and in-house financing.
