1. The Buy Here Pay Here business isn’t the car business, it’s the finance business.
Sure, you sell cars as a part of the BHPH business but what you actually are selling is your financing program. The car just happens to be what the proceeds of that financing are used to purchase.
In the car business, the higher gross profit the better, profit is realized either at the time of sale for a cash sale or just a few days later when you receive payment from the financing source, you have no part in collecting loan payments or salespeople are usually paid by commission on each sale. In the BHPH business, profit is not fully realized until the loan is paid off, you must make sure the customer keeps paying and paying commission on money you may never collect can be suicide. A BHPH dealership should operate more like a small loan company than a car dealership.
This is where many franchise and independent retail car dealers have the most trouble in understanding Buy Here – Pay Here. Because a BHPH dealership looks just like their existing car lot, they think it should operate the same way. Going down that road can land their operation in serious trouble.
2. You can go broke making too much gross profit.
There are 4 basic variables in designing a loan repayment plan; the amount financed, the interest rate, the payment amount and the term of the loan. In BHPH, the interest rate is normally the same for all customers so we can take that out of the equation. BHPH customers have a pretty fixed amount of money they have available for down payment and it is difficult to get additional money down. The same is true for payments. The amount of money a BHPH customer can afford to pay out of each paycheck falls in a pretty narrow range. Trying to get them to pay more is difficult and may lead to additional problems collecting that account.
That means that, as we increase the amount financed by adding additional gross profit to a transaction, the only other variable that can change is the term. As we add more and more gross profit, the loan term gets longer and longer. As the term gets longer, it becomes more likely there will be mechanical issues with the vehicle or personal issues in your customers’ lives that affect their ability to pay. There will come a point where every additional dollar of gross profit is offset by additional dollars spent collecting these accounts. You eventually can reach the point where too much gross profit will lead to excessive collection and repossession expense and charge-offs, crippling your dealership.
3. When the car stops running, the customer stops paying.
Every BHPH dealer has heard, and experienced, some version of this saying. BHPH customers regularly refuse to pay for vehicles they cannot drive. It does no good to recite the terms of their contracts to them.
One of the most important considerations when pricing your inventory is determining if, at that price, the vehicle is likely to run without major issues for the length of time it will take to repay that loan. If you do not believe the vehicle will run the length of the loan, you are setting your customers up to fail and setting yourself up for collection issues and charge-offs.
It is also important that you have policies and procedures in place should unexpected mechanical breakdowns occur during the term of the loan. Again, simply reminding the customer that they purchased the vehicle ‘AS-IS’ will do you no good. Without a running vehicle your customer will be unable to get to work to earn the money to make their payments to you. You should be prepared to assist them in keeping the vehicle operating so you can collect all the money owed to you.
4. Keep a good customer in a car and paying
It is a fact of life that a BHPH customer is likely to face some situation during the course of their loan that will keep them from being able to pay you. Missed or late payments and delinquency is a fact of life in the Buy Here Pay Here business.
How you deal with these issues will determine how easy or difficult your collections are. Helping a good customer when necessary so that they can stay in their vehicle and eventually pay off their loan will help to minimize collection problems. It will also make for happier customers and lead to more repeat and referral business.
5. You must inspect what you expect
Analyzing the performance of your dealership is an ongoing process. You cannot expect to reach your goals unless you inspect how you are performing. The same is true for your employees. You cannot expect them to do everything just the way you would like them to if you do not inspect their work and offer constructive criticism and training so that they can become the employee you want them to be.
Change does not occur in a vacuum. It requires effort in analyzing where you are today and where you want to be tomorrow. It takes determining a plan for getting from one to the other. And it takes inspecting every step along that path on a regular basis to make sure you are not veering off-course.