The Value Proposition For BHPH and Special Finance

By Peter A. Salinas
Dealer Business Journal
January 2008

Last month I really didn't give any prognostications, and I'd like to rectify that this month.

I believe that automotive retailers will continue to face the brunt of legal, regulatory and legislative fervor from politicians and citizens watchdog groups who are convinced that car dealers are an enemy of the people and need to be at the very least, watched carefully, and perhaps punished severely because of what they do for a living.

I cannot tell you the number of times I've told people what I do for a living, only to have them roll their eyes and then proceed to tell me that they know that those buy here-pay here dealers and special finance lenders do nothing but prey on poor people who have no other options in their lives but to pay 20-25 percent interest for their vehicles.

For those that listen, this is what I tell them. I hope it's some help to you when you're faced with a legislator, lawyer, judge or jury who expresses the same opinion.

There is an underclass in our society, an underclass of people who for a variety of misfortunes and social and political reasons do not have the education, training or wherewithal to have what you have. Companies worth billions of dollars mark them with credit blemishes, because they have not paid the money back that they have agreed to pay when they agreed to pay it. In our society, that is a serious negative behavior, which results in punishment in the form of paying higher rates to borrow money because your past behavior indicates that person is a greater credit risk. Just ask anyone who ever transferred their account balance over to a credit card with one of those 0 Percent offerings for 12 months. If they make one late payment or go over their credit limit that 0 percent deal translates to 25-28 percent interest, overnight.

Still, despite their credit challenges these people need to get to work, take their children to school or go to the doctor's office. They need a vehicle, and vehicles cost money.

Twenty years ago, a dealer could buy a vehicle for $700, put $300 into it, and sell it to a buy here-pay here customer for $2,995 if they put $1,000 down. Every payment made went to the bottom line. Those days no longer exist, and if anyone tells you they still do, he or she simply doesn't understand the buy here-pay here business model.

Today dealers must put up sizeable amounts of capital to secure inventory, recondition it, pay staff and have all the overhead with running a business, including liability and garage insurance. They must then "loan" their customers the money to buy a vehicle. They are putting their own money on the street to provide these customers with affordable transportation. This money comes with a cost associated with it, based on the risk the customer presents. In this segment of the economy one in four to one-in-five customers do not pay the dealer for the vehicle and it must be repossessed. When that occurs, cash flow ends for the dealer and the costs begin to mount. The dealer, however, never knows for sure which customer will not pay him, so to make the model work the dealer must charge a high interest rate. If the interest rate is lower, dealers typically mark up the vehicle enough to make up the difference.

It's not any different when borrowing money from a special finance lender. Consumers whose credit score still affords them the ability to secure financing through a lender, must pay a higher interest rate based on their score. Instead of dropping off cash at a dealership, they send in their payments to the lender. The business model is roughly the same. You charge a higher rate because of the greater risk, do your best to ensure prompt payment, collect when they are late and avoidrepossessions at all costs. The question becomes if not for these dealersand lenders willing to accept the risk associated with lending money tothese customers, how would they get enough money to buy a vehicle to purchase a vehicle to get around? Government transportation is typically unavailable in many areas and often not practical. Family members may love the person, but are not going to lend them $5,000-$7,000 to buy a vehicle. Friends? I don't think so. The government provides some citizens with hundreds of dollars a month for Food Stamps, but nothing as yet for Car Stamps.

Finally, people are going to do whatever they can to get a car in this country. If it means paying a dealer $80 a week for the freedom and value a car brings to their lives, they will do it. The amount of money financed or the terms means little. It's their willingness and ability to make the payment that's the difference.

People can improve their lives by making timely payments to car dealers. No. 1 they have a car, which allows them to be gainfully employed. Also, most dealers report timely payments to the credit bureaus, which can eventually end their dependence on his type of high-cost financing.

Even though all of the above is true, there are still many out there who prefer to believe the retailer is making exorbitant profits on the backs of the poor. Unscrupulous individuals who disregard laws and regulations, take advantage of their customers or just generally stink at being a dealer give the entire industry a bad name. But there are those in every retail industry in the country.

(Peter A. Salinas is a career journalist who has been covering the used-vehicle industry for more than eight years. He is the managing editor of Dealer Business Journal.)