The Three Generations of Buy Here Pay Here Dealers

Is your buy here pay here operation rooted in the past, living in the present or prepared for the future? Let’s take a look at the three generations of BHPH and how today’s top operations are preparing to lead the way into the future with generation three. While there are three distinct, definable models of BHPH dealerships, most actual dealers will exhibit some traits of more than one generation. Where does your dealership fall?

The first generation of BHPH dealers was definitely low-technology but was also actually lower-risk than the generations that followed. Lots were small, sometimes gravel, and the dealership itself bore little resemblance to a new-car store or high-volume used-car store. Often, the dealerships were trailers parked on a lot or converted gas stations. Account records were kept by hand on ledger cards while contracts and other paperwork were handwritten. The down payment was typically the amount the dealership owned the vehicle for, so only the profit was at risk. Inventory consisted of the cheapest vehicles that dealer could find. There are still generation-one dealers in operation today, but their numbers are dwindling fast.

The next generation of BHPH dealers represents the majority of dealerships operating today. Facilities have been upgraded to rival other auto dealerships. Technology has been introduced starting with sales and account receivable tracking through the use of dealership management software. The majority of dealerships process sales and payments on their computers today. Because the amount of cash BHPH customers traditionally have available for down payments has not increased at anywhere near the rate of inventory cost, today’s dealers are financing a large portion of their inventory cost as well as the profit in each deal. Most dealerships are still relatively small and were designed to serve a limited area so customers would make their payments in person and dealership personnel had the opportunity to see their collateral every time a payment was made.

For this reason, expansion took the form of opening additional stores just far enough away as to have a slight overlap of service area with the original store in that direction. Dealers began experimenting with different inventory price points, resulting in several different business models based on inventory cost. Lease here pay here was introduced and its use as an alternative method continues to expand. In the last few years, stores in this category have begun to dabble in payment assurance devices and GPS locators to protect their collateral along with websites and non-traditional methods of collecting payments.

That brings us to generation three—tomorrow’s buy here pay here dealerships. Advances in technology are becoming much more widely adopted. BHPH dealership software now often includes CRM modules and some type of scoring system to standardize underwriting criteria. Dealership websites for dealer-controlled financing (DCF) dealers have expanded, and their adoption has more than doubled in the last 10 years. Mobile websites specifically designed to be accessed via a smartphone are becoming popular. The evolution of payment assurance devices from code-based systems where the customer must get a new code from the dealership after payment is made to Web-based systems that can be controlled from any computer with Internet access has allowed dealers to make loans further away from their location. The cost of these devices, coupled with GPS locators, has decreased to a point where they make economic sense for all but the smallest dealerships. Over 60 percent of BHPH and LHPH dealerships now use payment assurance devices, GPS or both. Technology has also changed the way generation-three dealers collect payments from their customers.

Since BHPH is a cash flow business, today’s savvy operator knows that he or she needs to make it as easy as possible for customers to make their payments in as many ways as possible. This includes avenues such as accepting credit and debit cards, setting up ACH withdrawals from checking or savings accounts, and making it possible to make payments directly on the dealership’s website. Dealership management software with the ability to accept payments from a customer’s mobile device has begun to appear.

The ability to know where your collateral is at all times, control your customer’s ability to use that collateral should they not make their payments, and collect payments regardless of a customer’s location has changed the pattern of expansion. In order to take advantage of economies of scale, the trend for generation-three dealers will be to go to larger, regional dealerships. The centralized locations will reduce expenses, maximize utilization of inventory dollars and provide for more uniform performance standards compared to separate locations. Technology will also affect the way generation-three dealers market their stores. Website, email, text and social marketing efforts will all but replace the traditional print and electronic media.

As you can see, technology will drive generation three. Many dealers will resist the change, claiming they can’t afford this technology. In truth, adopting technology will probably save money in the long run. Effective customer management through email, text and social marketing will result in more repeat and referral sales. Payment assurance technology is an important tool in training customers to make their payments on time and reducing the amount of time devoted to collection activity. Increased methods of making payments will assist customers in making timely payments. GPS locators will tell us exactly where the vehicle we wish to repossess is, reducing the time spent skip-tracing and eliminating wasted trips hoping to find it. Because of the confidence the latter two give a dealer in his ability to collect the account or the collateral, more sales over a wider area can be made.

As we move into a new decade, it is time to embrace change, not run from it. It is time to move your dealership into the next generation. Don’t get left behind.

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