Tax Time and The Blinding Light of Big Down Payments
January 2012, Auto Dealer Today - WebXclusive
Here we go again. It’s tax time! Is everything ready? Have you pumped up the inventory? Is the sales staff excited? I hope so. In our neck of the woods, we experience about 40 percent of our yearly sales by April if we can find enough inventory. Tax season has changed over the years from being steadily busy for most of the 90 days to now having about a three-week crush centered on the first of February. The rest of the quarter is busier than our average but “crunch time” has gotten shorter.
One thing that always made me scratch my head is the fact that many BHPH consultants confirm that February is generally the largest month for static pool losses. I know we all do more business in that month so it stands to reason that we would see more repos from that pool, but sometimes the loss numbers I read about are amazing.
What I believe happens is the “blinding light” of big down payments. I have never subscribed (in BHPH) to the thought of “bump the down and roll the rig.” Down payment does not matter in the overall performance of a loan. The only time we make a loan based on down payment is if a customer is outside our normal underwriting guidelines but has enough down payment to cover our costs. If the down covers our cost (generally about 50 percent of asking price) on a vehicle and they are willing to make short-term payments, then they can drive.
We actually tighten up our underwriting during the tax season so that the inventory we acquire goes into a better-performing portfolio. Yes, it is great to get $3,000 to $4,000 down on a loan (our loans average about $12,000), but if it looks like that is about all we’re going to get, then it is not enough to justify rolling that car.
I realize there are many different BHPH business models. Our operation’s average ACV is between $5,000 and $9,000 with asking prices of $10,995 to $14,995. If the customer meets our guidelines, we will close the loan on an upfront $200 down. We always add deferred down payments to help cash flow. Our sales staff is paid primarily on down payment which helps keep our average around $1,600 per unit. Big down payments are great, but underwriting is the key to good loan decisions.
Tax time is an important time for making money. Do not let the blinding light of big down payments be the reason for huge charge-offs this summer.