"Till Payoff Do Us Part"

I hope those of you reading this, who on the sales side of our business, won't form an angry mob and hunt me down for making this statement, but here goes: In the world of Buy Here-Pay Here (BHPH), selling cars is the easy part.

Now, put down your pitchforks because I know first-hand how frustrating selling vehicles is at times and the challenges it carries (which we will address in future articles). With as much blood, sweat and tears that go into the sale of a BHPH unit, in many ways, our work has just begun. In BHPH, even more so than “conventional” auto sales, we can’t just be concerned about moving the metal over the curb. We have to “marry” our customers for the term of the loan, and often, it is truly “for better or for worse”.

In past articles, we have addressed the importance of focusing on affordability when reviewing customer applications to ensure they will be able to afford payments for the next 130 to 156 or more weeks. That philosophy is best summed up by these words of wisdom: If their OUTGO exceeds their INCOME, their UPKEEP will be their DOWNFALL. It will be our downfall too if we finance them.

Because we have seen that statement hold true more times than we care to admit, we finally smartened-up to the importance of focusing our underwriting on affordability data, such as the amount of disposable income and debt-to-income ratios. In addition, here are three lessons learned the hard way that can improve the performance of any portfolio.

Lesson one: Avoid co-signers. Co-signers sometimes give a false sense of security to the deal. It doesn’t matter if it is a parent with decent credit or a brother who has paid us perfectly; when it comes time for the co-signer to step up and help, more times than not we are told, “Well, I can’t really help financially. I just co-signed to help them get the car.” The solid co-signer deal we were so proud to put on the books suddenly looks very shaky and will, at best, be a difficult account to collect even after many tense discussions. Our experiences have taught us that if you wouldn’t loan money to the applicant alone, then more than likely, adding a co-signer — no matter how financially strong — usually won’t turn a bad deal into an acceptable one.

The only exception to our “anti-co-signer” penchant would be if the vehicle will be used by both parties. For example, when you encounter a preferably long term and stable live-in boyfriend/girlfriend situation, it is generally in your best interest to have both parties on the contract as co-buyers. Obviously in this case, they both have a vested interest in keeping the vehicle, not to mention that if you report to the credit bureau, they will both be getting rewarded for payments made on time.

Lesson two: Know how much your customer drives. This can often be overlooked during the underwriting process. We suggest asking the customer their estimated annual mileage as a pre-qualifying question when gathering credit information to review for underwriting. Obviously, customers could low-ball the estimate, but many will try to be as accurate as possible. You can also adjust the estimate as needed by looking at the distance from home to their workplace. Of course, the best scenario is when they are trading in a vehicle they bought from you, allowing you to calculate exactly how many miles they drive annually. I have been amazed at some of the mileage totals I have seen — unfortunately, those are usually on repossessions.

As a general rule, BHPH customers, on average, drive more than the national average. If one of the approaches mentioned above doesn’t yield a mileage estimate, we suggest using at least 25,000 miles per year, which is probably low. Regardless of which method you use to determine mileage usage, consider it in conjunction with the starting mileage on the vehicle they are buying. Then, adjust your term accordingly. One piece of advice: It is almost impossible to keep your term short enough or your gross high enough to net any profit from someone who will use the vehicle for delivery (i.e. Pizza, newspapers, etc.)

Lesson three: Know how many individuals live in the household. This is a small, but mandatory question to ask, since it has a major impact on the deal and how affordable the proposed payment will be for the buyer. When assessing the customer’s ability to pay, don’t neglect to find out how many people are in the household. The cost of living for a couple is much less than for a family of seven. In other words, a married couple can probably get by on $1,200 per month in some markets. However, start adding children and all the expenses associated with them and disposable income drop drastically. The more children you add, the tighter it becomes.

I definitely don’t want to force a customer to take food off the table to make their car payment. Now, giving up cigarettes, lottery tickets, and/or premium cable TV packages are different matters. By spending a little more time to underwrite properly, we can assure we get the customer started on the right foot, which sets them up for success as we work with them “till payoff do us part.”