The Buy Here Pay Here market continues to grow. According to studies done by Experian, 9.18% of all vehicles financing in 2010 and 14.38% of used vehicle financing were done by BHPH dealers. Last year those numbers grew to 9.8% of all vehicles and 16.62% of used vehicles financed. As the economy continues to struggle, it appears this growth trend will continue for 2012 and beyond.
Growth in this market has increased the number of dealers interested in finding out more about the Buy Here Pay Here business. An increasing number of those dealers are franchise dealers looking to add a BHPH operation to their existing business but the list of interested dealers also includes independent retail dealerships looking to expand the financing options they offer their customers as well.
Here are 5 areas you need to consider as you determine whether the Buy Here Pay Here business is right for you:
1. Commitment
Commitment is critical to the success of your Buy Here Pay Here dealership. Establishing this operation is a decision not to be taken lightly. The BHPH business is not the car business, it is the finance business. In traditional retail business, when you finance a vehicle it is someone else’s responsibility to collect that loan. Now that will be your job and effective collections are the key to success in BHPH.
You must commit the time and resources to learn about the BHPH business. There are numerous resources available including our own DCF Consulting Group. Commit to learning all you can, training your employees on proper operations and best practices and hire the right people to help you, if necessary.
2. Capital
Various models of the Buy Here Pay Here business using vehicles with vehicle costs ranging anywhere from $1,000 TO $15,000 have been successful in this business. The business model you decide to adopt as far as vehicle cost will determine the amount of capital you need.
Remember, you will be putting out money to replace vehicles you sell having only collected the down payment on that sale. It takes some time before you are collecting enough in payments to restock the inventory and cover your expenses. Selling 12 cars a month that you own for $3000 after reconditioning and sell for $6995 at 12.95% APR will take just over 1 million dollars before you turn cash positive.
You can get lines of credit, sell off notes along the way or use several other methods of obtaining capital but, unless you have a million dollars in the bank, you need to have that process determined before you open your doors.
3. Customers
The DCF market is composed of people who are ready and willing to buy, but do not qualify for traditional financing, i.e. banks, finance companies, etc. It is composed of people who have been turned down for conventional financing as well as the customers that other dealerships reject without submitting a completed application. The market also includes customers that do not attempt to purchase a vehicle from a dealership because they know they have poor credit and do not want to be embarrassed by being turned down for financing.
The average age of the DCF customer is 35 years old and they are usually in the lower middle class or working poor of the local economy. They range from senior citizens on a fixed income to younger people working at fast food restaurants. Despite varying income levels, they typically work every day but do not have any savings. Most are commonly referred to as “blue-collar” workers.
It is likely that, whatever town or city you live in, there are people who need BHPH financing. Your market research must determine whether that market is large enough to sustain your operation. You must also consider how easy it is for those potential customers to get to your dealership.
4. Staff
One of the keys to success at a DCF dealership rests on the ability of the dealership’s personnel to establish a friendly relationship with the customers. Much of that will depend on the attitude they have towards the customers. If you and your staff view your customers as inferior or bad, you will have a difficult time, both in sales and collections.
Dealership personnel must be committed to the belief that over 90% of the dealership’s customers are honest and good people. The vast majority of your prospective customers will be in a poor financial situation for reasons that they did not or could not control. We have all heard the expression, “bad things happen to good people”. Family sickness, divorce, job layoffs, overspending due to “easy credit”, major casualty losses, or a total lack of financial self control are conditions that all dealership employees should and must understand.
For more information on hiring for a BHPH dealership, see our blog post, “Hiring For Your Buy Here Pay Here Dealership”
5. Inventory
The goal of a Dealer Controlled Financing dealership is to provide basic transportation so your customers can drive back and forth to work in order to earn a paycheck and for typical family errands. More expensive vehicles mean longer payment terms, resulting in more of the dealership’s money at risk for a longer period. Longer repayment terms also increase the risk that something will happen to the vehicle or in the customers’ lives that will affect their ability to repay their obligation. Whatever price point you decide makes the most sense for your operation, you need to determine how and where you are going to find a steady stream of those vehicles.
