A Mid-Year Report On The Buy Here, Pay Here Industry

My CPA firm recently completed an informal survey of several buy here, pay here dealer clients nationwide to determine how the first six months of 2006 compare with the same period in 2005. Based upon responses from our sample, most dealers indicated that sales revenues were either flat or down slightly from the preceding year. Although our survey is not purported to be a true statistical sampling of the estimated 30,000 buy here, pay here dealers in the market, it does provide a reasonable indicator of 2006 industry performance.

In discussing the possible causes for the apparent market decline, dealers offered the following explanations:

  1. Gasoline prices have hovered around $3 per gallon for most of 2006. These higher fuel prices have reduced the disposable cash flow of their credit-impaired customers, which has impaired their ability to make large purchases.
  2. Higher energy and utility bills have also reduced customers disposable cash flow. A particularly warm summer throughout the U.S. made utility bills particularly expensive.
  3. Immigration reform has left considerable unrest among many buy here, pay here customers. Fears of job loss and possible deportation have made these customers more reluctant to make large purchases. The loss of or reduction in Hispanic customer traffic has been particularly noticeable. Immigrants are an important part of the buy here, pay here customer base.
  4. New car franchise sales have been softer during 2006. This seems to have had a corresponding effect on the buy here, pay here market. buy here, pay here customer traffic has apparently been lighter this year compared to last, according to most dealers we talked to.

It is difficult to pinpoint which of the factors above have had the single biggest effect. In addition, consumer prices for virtually all daily living expenses have continued to rise more rapidly than sub-prime customer income. In my opinion, all of these factors have combined to make the buy here, pay here marketplace more challenging.



Fortunately for the industry, it provides transportation to customers who have limited transportation alternatives. Therefore, it is my belief that these customers will eventually adapt to the factors above and find ways to purchase vehicles that are vital to their employment. Unfortunately, these adjustments take time and so in the short term, softer market conditions may continue.

Although most buy here, pay here operators can withstand short-term fluctuations in sales, collections are a different matter. Collections fuel the buy here, pay here engine, particularly during soft sales periods. Most of the dealers I surveyed reported that collections have remained strong even while sales have softened.

It is my belief that dealers with good underwriting and collection procedures always fare better in good, or bad, economic times. When customer cash flow is tighter, as it has been in 2006, dealers must compete for every dollar. This really requires that dealers be on top of their game in the underwriting and collection areas. Technology such as starter-interrupt and GPS tracking devices facilitate the collection process. These devices discipline customers to make timely payments and enable dealers to recover vehicles quickly if customers dont pay. In addition, collection costs are reduced by improved efficiencies caused by the use of these devices.

Techniques for skip-tracing and for locating customers who have defaulted have improved as well. The Internet and other new technology have increased recoveries for those dealers who use them.

On another positive note, most dealers reported that vehicle acquisition costs (which spiked sharply during the first quarter of 2006) have now declined. Some argue that these costs have really reached a level where they should have been all along! Although the industry no longer sees the sharp declines in vehicle cost during the summer months that it did a few years ago, a more moderate leveling of costs seems to have occurred. Vehicle cost reductions will enable dealers to manage portfolio risk more easily in the months ahead while staying competitive in the marketplace. This occurs because payment terms and the length of customer contracts dont have to be increased to absorb vehicle cost increases.

Unfortunately, some uncertainties are still ahead. Will gas go to $4 per gallon or drop to $2? Will utility prices decline? How will immigration laws change? All of these factors could impact buy here, pay here sales during the rest of 2006 and beyond. However, in the past successful operators have solved these challenges, made the necessary adjustments, and prospered. Collections should be your focus during these challenging economic times. Good luck!

Kenneth B. Shilson, CPA, is managing partner of Shilson, Goldberg, Cheung &amp- Associates, LLP, a Houston based CPA firm that serves the used car industry. He is president of Subprime Analytics, which performs electronic portfolio analysis. Mr. Shilson is also the founder of the National Alliance of Buy Here, Pay Here Dealers (NABD), which will host a BHPH Collection Academy near Atlanta, Georgia, at the Manheim DRIVE Center, January 9 – 11, 2007. For further information visit the NABD Website at www.bhphinfo.com or call 713-290-8171.

Kenneth B. Shilson

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