Just three short months after 9/11, Cochran implemented RTO at Bayou Auto Sales. While the RTO business model is similar to that of BHPH dealers, there are significant differences.
Avoid Bankruptcy Problems
The first and perhaps the most striking difference is that the dealer maintains ownership of a rented vehicle until the end of the rental term. Then, and only then, does the renter acquire ownership. This equates to no dollars lost to bankruptcy, which BHPH dealers often face. Cochran chuckled while recalling his recent trip to Las Vegas to attend the 2007 BHPH conference. He and Rod Cochran, his brother and general manager, sat in on a seminar where bankruptcy was the topic. While the speakers were giving advice on surviving customer bankruptcies, his brother looked at him smiling and said, “We don’t have this problem.”
Recovery v. Repo
Also for the dealer, maintaining ownership simplifies the recovery of vehicles. In RTO transactions, the term repossession doesn’t apply, since the customer doesn’t own the vehicle. At Bayou Auto Sales, collecting payments hasn’t caused a lot of trouble. Cochran installs PassTime starter interrupts in every vehicle, and all customers must agree to the use of starter interrupt device in the rental contract. He allows his renters a 5-day grace period before the starter interrupt device is activated. Recoveries don’t consume much of his staff’s time; they only recover, on average, two or three vehicles a month. Cochran believes the starter interrupt device “teaches” his customers “how to pay.”
Grand Theft Auto
Another advantage of maintaining ownership of the vehicles customers rent is a much lower “chase rate” than the vehicles owned by BHPH customers. Al Lentsch, owner of Northland Auto Enterprises, coined the term “chase rate”, which is synonymous with delinquency rate. The national average chase rate in RTO is about five percent, compared to a rate of over 30 percent in BHPH. The reason is simple; if a car or customer goes missing, the car can be reported as stolen if the customer doesn’t pay since the dealer still owns the car. Grand theft auto is more intimidating to a customer than a ding on their credit report.
Cochran is pretty pleased with his customer base. He hasn’t had many problems with recovery and has only has to report a few vehicles stolen in the past six years. He has a lot of faith in his underwriter and brother, Rod, who has been the GM at Bayou since 2001. Rod has been in the collections business since 1988, which offers priceless experience he now uses at Bayou Auto Sales in the underwriting and collections department.
According to Rod, as long as a customer has a significant deposit to put down on the vehicle (typically between $1,500 and $2,000) and has never been habitually delinquent, that customer can be approved. The reason the approval process is relaxed is because the dealership still owns the vehicle, so it can easily be recovered if the customer doesn’t pay. However, most customers pay due to the starter interrupts. According to Rod, Bayou Auto Sales delinquency rate is a microscopic 0.04 percent.
CONTINUE READING THIS ARTICLE
Vol 5, Issue 8