What Dealer Based Financing Entails
For the first time, Auto Dealer Monthly’s annual Auto Finance Survey included dealer based financing (DBF), which encompasses buy here pay here, lease here pay here and rent-to-own. The vast majority of dealers who responded to the survey (82.6 percent) average fewer than 150 sales per month.
When comparing their collections in 2009 to past years, most responding DBF dealers said their collections were about the same. Almost 22 percent of them said their collections were better, and about four percent responded that collections were much better. Conversely, 28.4 percent said collections were worse or much worse this year.
Many responding dealers (57 percent) in the DBF space operate a related finance or lease company, often citing the tax advantages associated with this arrangement as the reason for doing so.
Underwriting isn’t just about whether a customer can purchase but it is also about what the repayment terms should be. Dealers often have differing opinions as to how a repayment schedule should be set. Whereas most dealers want all payments set on the same days customers get paid, regardless of how often that is, others simply want payments once per month to reduce the amount of paperwork handled. However, the gap between the two payment views of this year’s respondents wasn’t very wide with only 15 percent difference.
Collections is another aspect of operations that DBF dealers must keep a close reign on. Survey results show that most dealers (71.7 percent) have only one or two collectors on staff. One aid to the collections department is the use of payment protection devices; however, a slight majority of the dealers who completed the 2009 Auto Finance Survey don’t utilize them. Of the 48.8 percent who do install the devices on inventory, 63.1 percent of them opt for devices with both starter interrupt and GPS functionalities, while 36.9 percent use devices which are either starter interrupt or GPS.
Experienced DBF dealers will tell you that if a customer’s car doesn’t run, the customer doesn’t pay. Many customers of DBF dealers don’t have the cash on hand to pay for a large repair and a car payment. These two facts highlight the importance of these customers having either a service contract or a warranty. Almost 54 percent of DBF dealers who responded to the survey sell extended service contracts, while 8.5 percent provide them at no cost (AKA a warranty). That leaves just over 37 percent who don’t sell extended service contracts.
More survey results were printed in the November issue of Auto Dealer Monthly, you can find that story in the digital edition.