Buy here pay here (BHPH) car lots work differently from traditional dealerships because the dealers at BHPH lots are the lenders. BHPH lots often get a bad reputation based on some outdated notions on their mode of operation, but they can also be a welcome option for people who struggle with bad credit and may not be offered a car loan.
For a lot of people, especially low income earners, credit issues might make it difficult to purchase a vehicle. These people may consider shopping at a buy here, pay here lot since the requirements are typically less strict when it comes to approving customers for credit. Starting a buy here, pay here dealership can be a lucrative business, since your target market will be consumers who expect to pay higher interest rates.
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.
BHPH businesses require huge capital investments, so you need to make sure that you are ready for this. Various models of the Buy Here Pay Here business using vehicles with 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.
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.
For you to be successful in this business, you have to decide if you would like an independent or franchise dealer license. If you plan to sell new and used cars, then obtain a franchise license. Obtain an independent dealer license if you plan to sell used cars only. Depending on your state, expect the DMV to send a representative to inspect your car lot. The DMV may also request a copy of your lease, or proof or ownership of your car lot, proof of insurance, and a surety bond of at least $25,000.
Another important thing to consider when starting your BHPH business is your car lot. When choosing a property for your buy here, pay here lot, check with your local or county government to determine what zoning laws or permits are required. Consider hiring a real estate agent to assist you with locating a commercial property for your car lot.
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.
Whether you are a member of a twenty group or purchase reports on your industry, its good practice to measure your performance and to know where your business is lacking and/or thriving. One major advantage of being an active DCF dealer is that you receive monthly composites which allow you to analyze your performance by comparing your performance to other DCF lots and benchmarks. The electronic composite consists of four pages.
After establishing their first BHPH operation, dealers often see the potential for a second operation, but choosing the location can be difficult. The active DCF dealer will be assisted in location selection, generally 10 to 15 miles from the original location. There is another start up fee for an additional lot of $7,500. Other BHPH dealers feel that the distance is not as important as the control factor of the operation, opting to open lots as far away as 75 to 100 miles from the original location.
Every dealer agrees that the best advice is to adhere to set practices, but understand that exceptions have to be made sometimes. Not every customer will fit into the underwriting guidelines you have defined. If you never make exceptions you will lower your risk, but you may miss some good paying, loyal customers along the way. So, each customer must be viewed individually.
More and more franchised dealers are jumping into the buy here/pay here (BHPH) pool. The trend was given a boost by the post-Great Recession credit crisis, which contributed to a growing population of working men and women who were unable to access financing through banks and other traditional lending sources.
Do you have the ability either set up a BHPH lot at your dealership, separate your inventory from your BHPH inventory, or close to your main location? Are you able to set up a Related Finance Company at a different physical address than your dealership? The reason I ask these questions are first, many dealers move/advertise their slower moving inventory as their BHPH eligible inventory, where the pricing/sales strategy may be different than your standard inventory. Also, the IRS requires a separate physical and mailing address to set up a Related Finance Company.
The main point for correct inventory for your BHPH customers is not to purchase vehicles where their ACV/Selling Price is too high to qualify for Payment to Income caps for your customers. Therefore, you need to understand the typical income and down payments for customers in your market, the higher their monthly incomes and down payment, the more expensive vehicles you can stock and sell. Once you determine what these amounts on average are, they you back into the Average ACV you are targeting for your inventory by using Payment to Income.
How this is done is by discounting the loan when you sell it from your dealership to the Related Finance Company, based upon your projected/actual historic loss rates on your loans, so you will not have to pay taxes on money you never receive. If you project or realize that you will not collect 25% of the loan amounts on your books due to repossessions\early payoffs, or Allowance for Bad Debt, then you would sell/assign the loan to the Related Finance Company for 75% of the loan amount financed. This will cause your dealership to record a much less profit than standard retail sale only, or even takes a loss on the sale of the vehicle when it is sold, therefore minimizing the tax liability is incurred a t time of sale, deferring it over the time of your loan periods. Your income and tax liability will be made up on the Related Finance Company side as your customers make their payments on their loans.
By financially levering your Floorplan line, you will be able to free up cash to help stat up your BHPH program, and floor more inventory to increase your sales and number of loans that you can originate. Many BHPH dealers utilize the National Floorplan Lenders listed below, where they have several different programs that will meet your business goals. Others will work with their local banks and credit unions to obtain these Lines of Credit for inventory and working capital.
You will need a system to underwrite your loan, store the customer/applicant information, pull credit reports, send Approval and Declination Letters, store the vehicle information, print your loan documents, fund the loans, track payments, collect/service your loans, talk with the GPS/Starter Interrupt systems, create your monthly Accounting Reports, track your static pools, track your repossessions/write offs, report to Credit Reporting Agencies, and integrate with your Dealer Management Systems. There are several vendors that offer several of these products and services at a variety of costs, with several listed below, so please take time to ensure the Loan Origination/Loan Servicing System will handle your current and future BHPH program and customers.
A large part of the increase in profitability per vehicle sales and in customer satisfaction for BHPH dealers is due to their ability to set their own Loan to Value caps, allowing room on the customer loans to include financing of Warranties and Insurance Products offered, versus being capped with a low Loan to Value by their indirect lenders, where only the vehicle and taxes are allowed on the loan by the indirect lenders, local banks, and/or credit unions they use.
Many feel this is a great benefit of having a more flexible BHPH loan solution to better protect the customer and their vehicle, keeping their vehicles running and them paying their payments on time. Whether you decide to offer F&I products from Warranty and Insurance companies, where they pay the claims and take this risk for a portion of the premiums paid, or whether you decide to offer you own products via Reinsurance companies and pay your own claims and keep more of the premiums, setting your own Loan to Value levels with your BHPH loans should increase your Profit Per Vehicle, your bottom line, and your customer service satisfaction rates.
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