Buy Here, Pay Here: Mid-Year Report

I recently completed an informal survey of several buy here, pay here dealers throughout the nation to develop a perspective on first-half sales and collections. This article summarizes that survey and looks ahead to the remainder of 2007.

Most buy here, pay here operators believe that customer liquidity and inventory supply are the two of the biggest factors impacting their results during the first six months of 2007. Let us look at how these factors impacted buy here, pay here sales and collections and explore the reasons why. Virtually all dealers surveyed reported that 2007 sales have been flat or down slightly from the previous year. Collections on the other hand (until June) have remained consistently strong while sales have fluctuated significantly from month to month.

Let us explore how the economic conditions have impacted first-half results. Gasoline prices and inflation have robbed consumers of their liquidity. Fuel costs rose steadily during the first six months, until recently, when they mercifully declined. Inflation, particularly for consumer staples like food, has also reduced consumer liquidity. Retailers have increased the prices of the items consumers need (like food items) to offset slow sales in luxury and discretionary items. The impact of three dollar per-gallon-gasoline and the higher cost of consumer staples have been hardest felt by low-income customers, who are the backbone of the buy here, pay here industry. The impact of these economic conditions is felt in two ways: Customers have difficulty in aggregating enough cash for down payments and struggle to pay all their bills and still make car payments.

A closer examination, however, indicates that buy here, pay here customers are both determined and resilient. Many have altered their driving patterns and reduced discretionary expenditures to offset the increased cost of gasoline and groceries. Unfortunately, these changes in consumption only work temporarily. The decline in collections during June may be an early indicator that these lower income customers are now experiencing more difficulty in handling their financial obligations. Fortunately, for them and our national economy, the recent decline in gasoline prices, albeit modest, will definitely help. I hope that future declines will continue which will stimulate sales and collections during the second half of 2007.

On the inventory side, 2007 began with quality inventory being expensive and hard to find. Dealers who had to purchase significant inventory from December 2006 through February 2007 can testify to that! On the upside, used vehicle market prices are still driven by supply and demand, which has resulted in some acquisition cost relief during the second quarter of 2007. However, dealers wonder whether costs will start to rise as the summer ends and fall buying begins. Many operators indicated they believe that inventory acquisition is now a year-round job rather than a seasonal one. It is certain that dealers will need a broad selection of inventory if they hope to sustain or increase sales throughout the remainder of this year.

Although the economic landscape is challenging, there are some things operators are doing to keep their inventory healthy. They are finding the right vehicles for their inventory at competitive prices, by locating and developing new inventory acquisitions points or holes. In addition, they are carefully managing reconditioning and operating costs in order to sustain cash flow and profitability. Varying cost levels of inventory are needed in order to match customer budgets.

Collections provide the gasoline which powers the buy here, pay here engine. Successful operators monitor collections more closely as they fight for every dollar. Some utilize payment devices to aid in the collection process and reduce costs.

Although the survey results may not be particularly surprising, it is imperative that buy here, pay here operators make the right underwriting and collection decisions in the months ahead. The most successful operators do not rely on the possibility of further declines in gasoline and food prices. Instead, they study portfolio loss trends, make underwriting adjustments, tighten and improve collections, and carry a broad range of inventory in order to sell customers vehicles they can really afford. Good luck!

Kenneth B. Shilson, CPA, is a principal in Shilson, Goldberg, Cheung &amp- Associates, LLP,, and president of subprime analytics,, which performs electronic portfolio analysis. Mr. Shilson is also the founder of NABD, which will host an Underwriting &amp- Collections Conference in Houston Texas, on November 11 to 13, 2007. To register for the conference or for more information, visit or call 713-290-8171.

Kenneth B. Shilson


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