December 28th, 2021 by Jessica Biarbe
"Buy here, pay here" dealerships are auto dealers that not only sell cars but effectively act as the bank, too, by providing in-house financing, typically for buyers with bad credit.* Interest rates can be higher than other lending options and customers make car payments directly to the dealership.
Legislation was enacted effective January 1, 2013 to curb unfair and deceptive practices by a buy here pay here dealer, thereby protecting the consuming public. As defined, a buyer here pay here dealer or lessor does both of the following:
- Enters into conditional sale or lease contracts. A conditional sale contract does not include a contract for the sale of a motor vehicle if all the amounts owed under the contract are paid in full within 30 days.
- Assigns less than 90% of all un-rescinded conditional sale contracts and lease contracts to unaffiliated third party finance or leasing sources within 45 days of the consummation of the contract
A Buy Here Pay Here Dealer does not apply to the following:
- Lessor that primarily leases vehicles that are two model years old or newer.
- Certifies 100% of its vehicles, and maintains an on-site service and repair facility that is licensed by the Bureau of Automotive Repair and employees a minimum of five master auto technicians who are certified by the National Institute for Automotive Service Excellence
Requirements of a Buy Here Pay Here Dealer
Limits the use of GPS
After the sale of a vehicle the dealer must comply with the following:
- The buyer is made aware of the existence and use of the tracking technology. The buyer must give written consent to the tracking and the use of starter interrupt technology.
- The tracking device is used to repossess the vehicle or locate the vehicle to service the loan and keep the loan current.
- To use the electronic device for the optional service is separate from the purchase agreement and is not a condition of the purchase agreement for the vehicle, and is executed after the completion of the sale or lease of the vehicle. The buyer may cancel the optional service at any point in the future without affecting the sale and is informed that they have the ability to do so.
Limits the Use of Starter Interrupt Technology
At the time of sale, the dealer must notify the buyer in writing that the vehicle is equipped with a starter interrupt technology which can be used to shut down the vehicle remotely by the Buyer Here Pay Here Dealer.
- The written disclosure informs the buyer that a warning will be provided no less than 48 hours before the use of the system to shut down the vehicle remotely and discloses the method the warning will be issued.
- In the event of an emergency, the buyer shall be provided with the ability to start a dealer disabled vehicle for no less than 24 hours after the initial disablement.
The dealer must issue a 30 day or 1000 mile warranty:
- The buyer will be notified of the warranty - what parts and systems are covered.
- The dealer must either repair the covered parts that fail or cancel the sale or lease, reimbursing the buyer or lessee.
The Buy Here Pay Here Dealer may elect to refund the buyer or lessee a full refund, less reasonable amounts for any damages, excepting damage caused by a non-conformity with a written warranty rather than performing a repair.
In the event the Buy Here Pay Here Dealer cancels the sale or lease the following shall apply:
- The Buy Here Pay Here Dealer will give written notice to the buyer or lessee of the election to cancel the sale or lease by first class mail.
- The Buy Here Pay Here Dealer pays 100% of the cost of labor and parts for repairs under the warranty.
- The Buy Here Pay Here Dealer voids the purchase or lease agreement that waives limits or disclaims these requirements.
- Provides that a warranty is deemed to have been issued if the dealer fails to issue a warranty pursuant to these provisions.
A Buy Here Pay Here Is Prohibited from:
- Requiring the buyer to make their payments in person
- Repossessing the vehicle or charging a penalty following timely payment of a deferred down payment as specified.
Violations of these prohibitions is a misdemeanor and the Buy Here Pay Here Dealer may be fined up to $1000.
A Buy-Here-Pay-Here dealer shall affix a label on any used vehicle being offered for retail sale that states the reasonable market value of that vehicle. The label shall meet all of the following conditions:
- Be in writing.
- Printed with a heading that reads “REASONABLE MARKET VALUE OF THIS VEHICLE” in at least 16 point bold type and text in at least 12-point type.
- Be located adjacent to the window sticker identifying the equipment provided with the vehicle, or if none, it shall be located prominently and conspicuously on the vehicle so that it is readily readable.
- Identify all Equipment included with the vehicle.
- Contain the information used to determine the reasonable market value of the vehicle, including, but not limited to, the use of a nationally recognized pricing guide for used vehicles.
- Contain the date the reasonable market value was determined.
- Indicate the reasonable market value is being provided only for comparison shopping and is not the retail sale price or the advertised price of the vehicle.
“Reasonable market value” means the average retail value of a used vehicle based on the condition, mileage, year, make, and model of the vehicle as determined within the last 60 days by a nationally recognized pricing guide that provides used vehicle retail values or pricing reports to vehicle dealers or the public.
The legislation requires Buy Here Pay Here dealer to adhere to certain requirements on every vehicle sold or leased as follows:
- Requires a licensed repossession agency (LRA) to only transact business with another person or entity as an independent contractor, and prohibits an LRA from allowing anyone other than a qualified certificate holder, its owner, or its officer to manage its operations or transact business.
- Makes it a misdemeanor, punishable by a fine up to $5000, for a Buy Here Pay Here dealer to knowingly engage a non-exempt unlicensed person to repossess collateral on its behalf.
- Authorizes DMV to suspend or revoke the license issued to Buy Here Pay Here dealer if it violates the act.
- A repossessor shall not appraise or determine the value of any collateral whether damaged or not.
- Authorizes a repossessor to complete a condition report for collateral that makes a general assessment of the collateral but does not include all damage or missing parts as specified.
- Authorizes the Bureau of Security and Investigative Services (BSIS) to assess a $25 administrative fine against a repossessor for knowingly submitting a false report, not just reports submitted to an employer.
- Requires a repossessor to contact law enforcement within one hour after taking possession of a vehicle and continue to attempt notification until the repossessor provides notification.
- Prohibits a person, other than a peace officer acting in an official capacity, from interfering with the transport of a vehicle to a storage facility, auction, or dealer by an individual employed by a Licensed Repossession Agency or repossessor once repossession is complete, and makes it a violation of that provision an infraction.
- Prohibits a tow yard, impounding agency, government agency, or person acting on behalf of these entities from refusing to release a vehicle or collateral to anyone legally entitled to the vehicle or collateral, except a vehicle being held for evidence by a law enforcement or prosecuting attorney.
Convenience of a Buy Here Pay Here Dealer
Working with a Buy Here Pay Here Dealer, their customers enjoy the benefit of a one stop shop. As a Buy Here Pay Here Dealer, they are taking the customer from A-Z in the buying and financing experience, saving the customer time and simplifying their purchase. The Buy Here Pay Here Dealer can assist a customer who struggles with subprime credit by offering or extending them credit where the buying experience is more complicated in a traditional financing situation. The Dealer typically determines how much the customer can afford and payment options. Then the dealer matches them to the appropriate vehicle.
Growth of a Buy Here Pay Here Dealer
Credit challenged customers is fueling the Buy Here Pay Here dealers. Subprime lenders shy away from a consumer who have poor credit ratings or have poor work history, thereby rejecting the applicant’s loan.
As the Buy Here Pay Here Dealer, your business is assuming the risk of repayment on the loan provided to your customer in the case of default.
Word of mouth by your consumer to their friends and family is also another way to grow your business. When a customer is treated fairly they are most likely to be a repeat customer knowing they have purchase power at your dealership.
Servicing The Loan
It’s important that you understand the affordability of the vehicle your customer wishes to buy, thereby keeping your default rate low. The terms on a Buy Here Pay Here loan is typically between 24 - 36 months with weekly or bi-weekly payments.
Just as any loan through a financial institution, it’s important to verify the information the customer is giving you on the credit application. It’s also important to stay on top of late payments to keep your payment delinquency low. If the customer is one day late, follow up to keep the loan in good standing.
Staying vigilant with following up on a late payment, Buy Here Pay Here Dealers can avoid excessive defaults and earn substantial profits. Helping your customers during difficulties can lead to customer loyalty and repeat business.
What Interest Rates Can Be Charged?
State usury laws determine the maximum interest rate a lender is permitted to charge. Buy Here Pay Here averages, according to 2018 NIADA studies is around 20% which is higher than a consumer would typically pay with banks and Credit Unions. Some dealers set rates much less.
While some dealers charge the maximum allowable rate, the average BHPH dealer has an APR of around 20%. Some set rates much less than that.
Your state's usury laws determine the maximum interest rate that a lender is permitted to charge. This could be anywhere from 5 to 24 percent, depending on where you live. However, the rules are complex and the rate caps don't always apply to car loans.
“Buy here, pay here” dealerships are auto dealers that not only sell cars but effectively act as the bank, too, by providing in-house financing, typically for buyers with bad credit.* Interest rates can be higher than other lending options and customers make car payments directly to the dealership.
Posted in: Auto Dealer Business