Buy-here, pay-here plans may attract more dealers

Growing customer base, higher standards may outweigh risks


Rosland Briggs Gammon

Automotive News | February 11, 2008 - 12:01 am EST




At the 103 DriveTime used-vehicle dealerships across the United States, buyers with less than stellar credit scores still have an opportunity to drive away with a used vehicle.

That's because DriveTime finances 99 percent of its car sales itself. With about 65,000 cars and trucks sold in 2007, it's the largest buy-here, pay-here dealership group in the United States, according to the National Alliance of Buy Here, Pay Here Dealers.

Buy-here, pay-here dealerships specialize in selling older vehicles to consumers with bad credit. The dealerships finance the loans in-house instead of turning them over to outside lenders. Because the loans are riskier, the dealerships charge higher interest rates than other stores. Rates average between 12 and 25 percent to people whose credit scores don't qualify them for traditional financing.

As lenders tighten their credit standards and the subprime mortgage industry fallout increases the number of people with blemished credit, more buyers may be headed to buy-here, pay-here dealerships to purchase cars.

And with average profit margins of 15 percent compared to 2 percent for new cars, according to the alliance, the buy-here, pay-here model may become a more attractive option for dealers.

Used-car dealership Credit Country Motors in Summerville, S.C., launched a buy-here, pay-here operation about a year ago, says Stan Borkowski, the dealership's treasurer. Buy-here, pay-here now represents about 20 percent of total sales.

"We were looking to generate another stream of revenue," he says. "We're taking a risk, but we want them (customers) to grow and get into our new-car franchises down the road."

Credit Country operates three new-car dealerships in South Carolina: McElveen Pontiac-Buick-GMC-Hummer in Summerville, McElveen Chevrolet in Mount Pleasant and McElveen Hyundai in Charleston.

Franchised and independent dealers are turning to buy-here, pay-here to offer customers more options, says Mike Sheridan, president of Global Debt Exchange Automotive. The company is an online marketplace that allows dealers and finance companies to buy and sell auto loan portfolios.

"It's just like when franchises started to get into used cars," Sheridan says. "The burden is falling to dealerships when traditional lenders tighten the lending criteria."

Higher standards

Industry professionals say the old buy-here, pay-here model associated with predatory lending has gone by the wayside. The industry previously lacked consistent accounting, reporting and analytical tools, says Kenneth Shilson, founder and president of the National Alliance of Buy Here, Pay Here Dealers. Lawsuits against dealers accused of selling overpriced, faulty cars also didn't help the industry.

Gerry Parker is COO of Integrity Capital Management in Alamo, Calif., which purchases loans from buy-here, pay-here dealerships. He says: "The traditional BHPH I grew up with 20 years ago — short-term, low-balance, high-interest notes with biweekly payments — has gone by the wayside. Changes in technology made a significant impact.

"Along the same lines, the years of the $3,000 automobile are gone. Used cars are more expensive than they used to be."

Also, Sheridan says, buy-here, pay-here dealers act in better faith because they realize illegal loans will raise the eyebrows of attorneys general and put the dealers out of business.

The industry also has come back into favor with financial institutions that lost money in the 1990s because of high-growth-rate requirements, Shilson adds.

"In 1999, the quickest way to end a conversation with a banker was to say 'buy-here pay-here,' " he says. "There was a tremendous credibility gap."

Better training

Today, established auditing standards and educational options for dealers have helped turn the industry around. The National Alliance of Buy Here, Pay Here Dealers and other companies offer educational conferences covering underwriting and collection tips. The alliance's annual conference typically draws about 2,000 people who come to learn about the latest regulatory and legal changes, Shilson says.

"There's more training because dealers realize the mistakes are better made by their competitors than themselves," he says. "If you make a lot of mistakes, it will cost you millions of dollars."

J.D. Byrider, which has 130 franchise and company-owned buy-here, pay-here stores across the United States, last year released an advertising standards manual that provides legal guidelines, spokesman Jim England says.

J.D. Byrider has had some legal problems. It was sued by the Kentucky attorney general and by the Ohio attorney general when those states received numerous consumer complaints, including grievances about pricing and condition of vehicles. Both suits were settled with terms that included the company reimbursing customers.

"We're focused on making sure our franchisees and company-owned stores adhere to strict standards on how to be effective operators," England says. "We're in a business that is extremely competitive and need to make sure is built on consumer trust because of so many operators who may have not dealt fairly in the past."

J.D. Byrider, which plans to open 15 locations this year including its first in California, also launched a Web site, www.jdbfacts.com, that provides daily customer feedback based on calls to 400 customers. As of Feb. 4, its 313,310 surveys resulted in an average customer satisfaction sales rating of 95 percent and service rating of 88 percent.

Still risky

But even with the return of investors, more standards and a growing customer base, the industry still faces challenges.

Today's vehicles are more expensive, and down payments have dropped. That means dealers who previously risked only $300 to $500 when the car drove off the lot now have $5,000 on the street, Shilson says.

Benchmarks compiled by the National Alliance of Buy Here Pay Here Dealers show the average default rate was 26 percent in 2007 compared with 26.2 percent in 2006. While unpaid loans remained steady at 17 percent from 2000 to 2002, they rose to 20 percent in 2007.

"It takes a tremendous amount of capital and an infrastructure with good systems to control it and make sure you don't get into financial trouble," Shilson says.

Some dealerships use starter-interruption devices to encourage their customers to pay. The devices allow the dealerships to disable the cars remotely if payments haven't been received.

But they don't always work. Credit Country Motors installs the devices in its cars, but in one week it lost three vehicles when customers disabled the devices, Borkowski says. The loss cost about $22,000, he says.

Buy-here, pay-here dealers also could face credit tightening, which would affect their sales, says Jon Ehlinger, a spokesman for DriveTime, of Phoenix. DriveTime finances its sales by pooling its loans and having bonds issued that are backed by those loans, he says. The loans are purchased by banks and companies such as Integrity Capital Management.

"If you don't have credit available, you're unable to sell a car," Ehlinger says. "As we go into 2008, how much will lenders pull back?"