Charging late fees is a practice some Buy Here – Pay Here dealers choose to do but an approximately equal number consider to be a bad practice. Those who charge fees when their customers pay late typically look at it as another source of revenue. Those who believe that it is a poor practice will, more often than not, site one or more of the following reasons.
1. Your customers will think it gives them permission to pay late.
I’ll never forget the story I heard from a dealer I know. He had just finished explaining the TILA box to a new customer, outlining all the terms of the transaction and when the customer’s payments were due. After explaining their late fees, the customer stopped him and said, “Then how much will my payments be with the late fees?” Since the dealer had late fees, the customer now knew he could pay late and was planning to do so. Is this the message you want your customers to hear. Or would you rather that message be, “We don’t have late fees because it is NOT OK to pay late.”
2. Your customers already struggle to keep their budget and make their car payments.
Why would you want to make it any harder for them to make their payments and keep their accounts up-to-date? Your goal should be to help your customers get to the end of their loan successfully so they can buy another car from you. It doesn’t make sense to throw additional hurdles into the road of making that happen. And yet, that is exactly what late fees are. It takes money the customer could be using to pay on his loan and diverts that money away from that purpose.
Some dealers will argue that a late fee is pure profit and an additional source of revenue for the dealership. I would argue that the additional collection, repossession and charge-off expense from customers who cannot afford to pay late fees more than exceeds any money collected as late fees. Understanding that delinquency is a fact of life in the BHPH business and working with your customers to help them pay out their loan rather than looking for every way to get a few extra dollars from them will also enhance your customer satisfaction and reputation. That will gain you additional sales from repeat and referral business that also will offset the money collected from late fees.
3. It is the easiest and most tempting way for your employees to steal from you.
Any dealer that charges late fees also has a method and policy for waiving those fees. Collecting those fees from the customer but waiving them in the dealership’s software program and pocketing that money is probably the single most common way employees steal money from dealers. The principal balance on the account is unaffected so this type of theft can go on for years without being caught. We all believe we hire honest people to work for us but this kind of theft is so easy it can be very tempting for an employee with money troubles of their own.
4. Late Fees create the potential for discrimination.
Depending on which customers are made to pay late fees and which ones have their late fees waived (whether real or not), your dealership may become susceptible to discrimination lawsuits. One interesting thing about discrimination suits is that no one needs to prove intent. It doesn’t matter that you didn’t mean to discriminate. If members of a protected class (blacks, women, Hispanics, elders, etc.) were charged late fees more often than non-protected class customers, you are guilty of discrimination. That could result in a lawsuit with penalties large enough to cost you your business.
If you don’t charge late fees, hopefully this article reinforces your decision not to do so. If you charge late fees, I would urge you to carefully consider the arguments above. With the automotive industry, in general, and the BHPH industry, in particular, facing increased scrutiny from legislators, State Attorneys General, the FTC and the CFPB, every practice at your dealership should be reviewed to determine which ones might draw a regulator’s attention. Late fees may be one of those you choose to eliminate.
