What Are In-House Financing Car Lots?

Have you driven past a dealership that advertised “no credit, no problem”? That’s an in-house financing car lot. An in-house financing car lot is a dealership that gives its own loans. Instead of borrowing from a bank or finance company, you’ll get your car loan directly from your dealer.

An in-house loan might seem like your only option if you have bad credit, but that’s not always the case. You might have other, less expensive alternatives.

How do in-house financing car dealerships work?

In-house financing car dealerships are a one-stop shop. In other words, the dealership will lend you the money (via a loan) so that you can buy a car from it. This is also called “buy here, pay here.”

Compared to traditional car loans, in-house loans are much easier to qualify for. The dealership sets its own eligibility requirements instead of following those of a bank or finance company. An in-house financing dealership might not run your credit at all.

For dealerships, this can be a win/win. In-house financing allows them to sell more cars (since more people qualify). They also get to collect interest and fees on the loans they give.

However, in-house financing isn’t always great for car buyers. People who turn to in-house financing often have bad (or no) credit. Since the dealership knows they might be the only ones willing to lend to these buyers, they charge ultra-high interest rates and fees.

Beware of precomputed interest

Some in-house financing car lots offer loans with precomputed interest. Under this model, the dealership will add your interest to your principal at the start of your loan. Then, it will split your total balance (including this interest) into monthly payments.

Precomputed interest does not benefit you, the car buyer. Extra payments you make at the start of your loan are applied toward your interest, not principal. That means you may not be able to pay your car loan off early.

In-house financing pros and cons

While not ideal, there are some benefits of in-house financing. Whether those benefits outweigh the drawbacks is up to you.

Pros

 Easier approvals: In-house financing lots aren’t beholden to the eligibility requirements set by banks and finance companies. In-house dealers cater to those who don’t qualify for a loan elsewhere, either because of credit or low income — or perhaps both.

 Same-day car loans: Your dealer won’t have to send your loan application to a finance company for review, so you’ll likely get your loan right away. Still, know that there are cheaper ways to get an instant auto loan that don’t require in-house financing.

 Might not require a down payment: Many in-house financing car lots specialize in zero-down bad-credit car loans. Although skipping your down payment can cause a host of problems (more on that later), it might be necessary in an emergency.

 Could offer a non-traditional billing schedule: Some in-house car dealers might let you pay weekly or biweekly instead of monthly. This might be helpful if you’re having a hard time budgeting.

Cons

 Higher interest rates and fees: Although states typically have laws that cap maximum annual percentage rates (APRs) on auto loans, these laws aren’t standardized. Caps don’t always apply to smaller loan companies, such as in-house financing car lots.

Further, some states allow dealers to charge whatever APR they’d like as long as the dealer lets the state know ahead of time. Some in-house loans have APRs as high as 300%.

 Limited to older cars: If you have your eye on a new (or relatively new) car, you may need to look elsewhere. Most in-house financing car lots stock older models.

 More likely to end up underwater: When you owe more on your car loan than what the car is worth, you’re underwater. This is also known as having an upside-down car loan.

Upside-down car loans are more likely if the car is older or not in perfect condition (because they aren’t worth as much). Plus, in-house loans have high interest, causing you to owe more than if you’d borrowed from a traditional lender.

 Might not improve your credit: If a dealership offers financing without reviewing your credit history, then it may not report your payments to the credit bureaus. In that case, your hard work making on-time payments won’t improve your credit score.

Alternatives to in-house financing

 Online lenders

You might find a bad credit car loan by shopping with online lenders. For example, Carvana doesn’t have a minimum credit score requirement. That doesn’t mean it approves everyone, but you might have luck even if you have rocky credit.

To make things easy, you can shop for five auto loans at a time at LendingTree’s auto loan marketplace. Many of our partners lend to car buyers on both ends of the credit spectrum. Checking rates takes just a few minutes and doesn’t hurt your credit score.

 Credit unions

As long as you’re a member, you might qualify for a credit union auto loan. Credit unions are nonprofit organizations, and many are dedicated to their members’ financial wellbeing. As a result, they may be willing to work with their credit-challenged members.

 Dealer-arranged financing

Dealer-arranged financing is not the same as in-house financing, but the process is similar. With this, the dealer will obtain auto financing for you. However, a finance company or bank will fund the loan rather than the dealership itself.

Some auto lenders (such as Westlake Financial) provide loans to bad-credit car buyers. But you can only apply with Westlake Financial through a dealer that is part of the lender’s network.

 Add a cosigner

Adding a cosigner to your auto loan can help get you approved, as long as that cosigner has good credit or better. This strategy can be risky. Missed payments will impact your cosigner’s credit as well as yours.

What to know if you are getting in-house financing for your car

• Exhaust other options. Before driving off with an in-house loan, make sure that you’ve explored every other possibility. You might qualify for an online lender that has lower rates, but the only way to know is if you try.
• Read the fine print. Read your contract, paying special attention to dealer fees and your loan term. Some dealers offer long loan terms to make monthly payments more affordable. However, the longer it takes to pay off your car, the more interest you’ll likely pay.
• Check car prices. Cars at in-house financing car lots usually have a marked-up sticker price. Check to see how much the car is worth before you buy. If the price is outrageous, walk away (or try to haggle).
• Ask about credit reporting. Choose an in-house dealer that reports your payments to the credit bureaus. On-time payments will likely help your credit score. In time, you might be eligible to refinance your auto loan for one with a lower rate.
• Make a down payment. Even if your dealer doesn’t require a down payment, consider one anyway. The less you have to borrow, the less interest you’ll pay. Also, making a down payment on your car can help prevent an upside-down loan.