And ever has it been — bad times for subprime is good news for buy here-pay here dealers.
Nearly every consultant, Twenty Group moderator, and successful buy here-pay here dealer has said: “When large institutional subprime lenders tighten their credit standards or exit the market altogether, buy here-pay dealers reap the rewards.”
These dealers gain a more target-rich marketplace with better credit-quality customers and typically incur fewer late payments and defaults.
While that maxim has been and will remain steadfast, given current economic conditions and the technological prowess, or at least access to it, of today’s consumer, buy here-pay here dealers face numerous challenges to profitability and the ability to grow their businesses.
Higher borrowing and labor costs, inflation, stubbornly high inventory costs, and increasing consumer late payments and defaults on credit card and auto finance contracts all point to more significant risks for those dealers hoping to grow their business. Buy here-pay here has always been risky, but the dangers are amplified and growing larger. Advantage can assist in mitigating those risks, but more on this later.
The Business Model
Buy here-pay here dealers can have vastly different business models, and vehicles can sell for between $9,000 and $15,000, sometimes even more. Cash-in-Deal has risen tremendously since the pandemic as the costs of business operations have steadily increased due to supply chain disruptions and inflation. Also, wholesale values have risen dramatically and remain stubbornly high, though there has been some value moderation recently.
Depending on the business model, dealers operating at the lower end of the vehicle value spectrum require a $2,000 (or more) down payment to cover doc fees, title, and taxes and have the consumer provide at least some principal reduction. At the higher end, dealers seek $2,500 or $3,000 down (or more) to keep the lights on and make a profit.
Given that the deep subprime customer can’t find financing elsewhere and that now, even prime customers pay 7-8 percent on a new car, it doesn’t seem that much of a stretch to enter into a buy here-pay here deal, even with the much higher interest rates. So long as they can afford the biweekly or monthly payment, which now is in the $375 to $550 a month range, they buy the car.
Buy here-pay here dealers aren’t in the car sales business but in the finance business. If they want to grow their finance portfolio, the task is simple — reduce the required down payment. That, however, only adds to their risks. When you put $10,000 to $15,000 of your own money on the street and in the hands of consumers who have a propensity for not paying their bills as agreed, you want to mitigate as many of those risks as possible.
The Economy
According to WolfStreet.com, Credit has tightened substantially for subprime. Loans are more challenging because finance company losses have led to more prudent underwriting. Subprime’s share of total originations of loans and leases dropped to 15.0%, down significantly yearly and even more from 2021.
Some say there is good news for buy here-pay here dealers, but the issues that led to subprime finance losses still face dealers. Fitch Ratings recently reported that 6.1% of car loans are now 60 days delinquent, the highest rate since 1994. Inflation remains at around 4 percent, and wages, while up, haven’t kept pace. That means the number of consumers able to put up $2,000 to $3,000 as a down payment to get the monthly payment they need is dwindling. Taking less than they want adds to dealers’ risks, but there is a way to lessen those risks.
Tech Savvy Consumers
I’m not going to discuss this in detail. Our reps hear nationwide from dealers and finance companies that consumers have become more adept at removing or disabling GPS units. Most dealers say it’s a small percentage of consumers that do this. However, because of the high value of the collateral, losing just one unit to a skip or not recovering a repo promptly results in an expensive loss. The only recourse is to get what they can for the unit at a salvage auction.
Advantage Risk Mitigation
I spoke at length with vehicle recovery expert James Waldron, CEO of Texas-based 1st Adjusters, Inc., during the recent New Mexico IADA Conference. He suggested that dealers use two devices on their collateral to facilitate vehicle recovery.
While unscrupulous consumers may locate and remove or tamper with a GPS unit, another device secured elsewhere on the vehicle allows for easier, safer, faster, and less expensive vehicle recoveries.
Advantage’s senior leadership has collectively been in the risk mitigation business for over 100 years, and they’ve seen a lot. That’s why our platform provides device tamper alerts. We also employ VIN Verify, compile, analyze, and share valuable data with our clients.
Dual GPS Protection Bundle
Given the stiff economic headwinds and the challenges of growing a portfolio and a more tech-savvy consumer, Advantage will take a lead role in doing what it can to reduce the risks facing the buy here-pay here dealer.
We are bundling our wired Evo and wireless Revo devices to add another layer of protection around dealers’ assets. Given that the collateral is worth $5,000, $7,000, or $10,000 in actual cash value, the added cost for the additional layers of protection is minimal.
Now is the perfect time to call us and learn how this Dual GPS Protection Bundle can help you better protect your collateral, grow your business, and give you greater peace of mind. We have many seasonal specials, and you can prepare for the 2024 Tax Season!
