November 2009, Auto Dealer Today - WebXclusive
What Do You Do When It Happens
What do you do when your buy here pay here customer stops paying for their vehicle? The first thing to do is expect it to happen. BHPH is a high-risk business where we actually loan money (through financing a vehicle) to people with terrible credit. Now, think about that for a moment. We loan money to purchase a vehicle to people who cannot manage their budget and have not paid their bills. So, why be surprised when they don’t pay you? You can’t be. It’s all part of the business. The key to success is not trying to avoid delinquencies or repossessions; it’s generating the maximum return on your investment portfolio.
There are three reasons people stop paying for their BHPH car loans:
1. They can no longer afford the payment.
2. Something broke on their vehicle and they are not willing to pay for the repair.
3. They found a better option and no longer need the vehicle.
That’s it. Every one of the excuses I have heard over the past 15 years in the business falls into one of these three simple categories, no matter how colorful or creative the words that come out of their mouth. Let’s take a closer look at each of the reasons so you can better understand the point and why I think it’s important to keep things simple.
There are two factors that make the loan unaffordable for the customer, deal structure or a life event. Unless you take a close look at the actual net income for your customers and budget their payment for them, including insurance, maintenance and gas, you are only fooling yourself to think they will pay for the car simply because they agree to the payment. Most of these customers will agree to a lot of things before they get a vehicle because they need it so badly. Be smart. Work out a budget before they ever drive the car off the lot by structuring a deal that makes sense. And don’t make the same mistake that many secondary finance companies do by putting a subprime customer into more car than they can afford.
The second factor that affects affordability is really nobody’s fault. It’s just life. We’ve all heard the phrase, “Bad things happen to good people.” Well, let me tell you, some of these people keep having bad things happen to them. Some of the events are caused by poor decisions, while others are simply bad luck and unforeseen. Nevertheless, those events make it so that a car payment is no longer affordable.
Several years ago , I learned that people stop paying for their vehicle whenever something major breaks on it or they don’t have enough vested interest (meaning down payment). Well, both are definitely true, and it is unreasonable to assume that customers will actually take care of and maintain their vehicle. So, you need to have a plan or a policy in place to handle mechanical breakdowns. Otherwise, you’re sending a truck out to pick up a repo.
Now, mechanical issues are easy to avoid. There are several options you can employ to prevent repossessions due to mechanical breakdown. You can sell service contracts, provide a warranty, finance the maintenance after the fact, or negotiate a side-payment or 50/50 split with the customer. The important thing is to listen, understand the real problem and communicate without turning the conversation into a conflict.
Face it, a lot of BHPH customers are not concerned with improving their credit score. And if they find a better deal elsewhere or simply get tired of the car you sold them, they may stop paying you. It’s not because they can’t afford it or something drastic happened in their life. It’s just because they no longer need it as badly as when they first bought it.
Each account is your asset, so when a customer stops paying, you need to protect that asset. Be aggressive about collections. Let me make a very important side-note on collections: It is absolutely your total responsibility to become an expert on federal collection laws as well as all state requirements for collections and vehicle repossessions. Otherwise, your business will be in jeopardy and/or you will have to pay some five- and six-figure fines.
Getting aggressive on collections means doing everything, step-by-step, to let your delinquent customer know that they are late on their payment and exactly what the consequences will be. Now, unless they’re dodging you, make every effort possible to work out an arrangement with your customer to keep them paying something, as long as there is a plan to get caught back up once they get through their problem. Be careful, because many of these customers are veteran dodgers of bill collectors with more heart-wrenching stories than you can imagine. A good collector, however, will actually be able to communicate and sift through the stories like an informed mother of teenagers on a Friday night.
You’re not going to prevent repos. In fact, you don’t even want to. They are inevitable with BHPH. You want to minimize their occurrence and when all attempts at redemption have failed, you want to be able to get your collateral back. You want to be able to find your car. There are several devices available and some incredible technology that can help you improve collections and locate vehicles marked for repossession. But the most effective tool I have ever used to locate a customer is the reference list.
Require a minimum of 10 accurate and verifiable personal references for every loan originated. Don’t accept co-workers as references either. BHPH customers change jobs frequently and we seldom repo a car from a place of employment. Instead, I want family and friends. And if you can get a mother-in-law on the list, that’s like a pair of pocket Aces in a high-stakes game of Texas Hold’em. The odds are pretty favorable that somebody on that list is owed money too and if you can connect with them, they are more than willing to share information with you.
Buy here pay here is a great business model, especially today when desking a subprime deal with a finance company is such a painful process. Delinquencies and repossessions go along with the territory, so don’t be afraid of them. Execute sound policies and procedures whenever an account stops paying, and when all else fails, go get your car so that you can keep the cash flowing and do it all over again.
Vol. 6, Issue 10