As the year closes, it is time to look forward and plan for next year. Recent performance data for the subprime auto finance market indicates that better days are ahead for independent buy-here, pay-here operators who can capitalize on the opportunities.
Recent data from Experian Automotive indicates that through the third quarter of 2016, “installment finance contracts with deep-subprime consumers dropped 2.8 percent to the lowest level on record since 2011. Looking specifically at used-vehicle financing, analysts noted that the subprime auto finance sectors saw an even larger decrease. Financing for consumers with deep-subprime credit dropped by 5.3 percent to 5.11 percent; the lowest Experian has seen on record since 2007.”
This market change with deep-subprime customers (who prior to 2014 purchased BHPH vehicles from independent operators) subsequently bought and financed them from franchised dealers, independent finance companies and credit unions. The recent market change now allows independent operators to regain that lost market share.
The third quarter Experian report shows that lenders reduced loans to subprime and deep-subprime risk tiers while increasing loans to consumers with better credit. Although the credit unions continue to aggressively grow market share, the other competitors have tightened underwriting standards and are focusing on consumers with better credit scores.
Independent operators can benefit from the aforementioned market change by regaining market share lost during the last three years if they are positioned to do so. Here are the important things they will need to prosper in 2017 and beyond:
1. Capital availability to fund future growth.
2. A proper business model to “keep the new deals sold” over the life of the installment contracts.
3. They must rebuild their “bond” with previously lost customers and use the web and social media to find new ones.
4. Participate in dealer education to avoid underwriting and collection mistakes that reduce profitability and create costly compliance problems.
5. Carry inventory that provides affordable transportation to credit impaired customers on reasonable terms.
Here are the best ways to get the items needed to succeed:
1. Capital to fund portfolio growth should come from collections, equity or from borrowings under lines of credit or by selling previously originated contracts. Dependence on borrowed capital or by liquidating existing portfolios reduces an operator’s financial flexibility and should not be relied upon. “Keeping contracts sold” and collecting payments is more important than just increasing originations.
2. The best way to evaluate your existing business model is to study past bad debt losses. This analysis requires you to look “under the hood” of your portfolio at year-end when all charge-offs have been recorded. To understand what performance metrics are needed and ways to utilize this information to make better underwriting decisions visit www.subanalytics.com and watch two free videos on the home page of this website.
3. The best way to rebuild customer relationships is to past customers via mobile, web and social media technology. You may find that those customers are unable to afford the vehicles sold to them by your competition and are seeking more affordable transportation.
4. Dealer education is needed to become familiar with market and regulatory changes and to avoid making compliance mistakes. At the NABD National BHPH Conference on May 23-25 at Encore in Las Vegas the program will focus on “the changing world of BHPH” and the best ways to meet new challenges. Legal and regulatory updates will also be included in the conference agenda. The more you learn, the more you will earn.
5. Efficient systems are needed to grow portfolio profitability. During the last three years, many independent operators reduced overhead due to reduced sales. Instead of restoring these previous overhead levels, implementing new and improved technology for underwriting, collections and inventory sourcing is a better alternative. Operators can see and evaluate the new technology at upcoming educational conferences.
6. Sourcing, acquiring and reconditioning good inventory has always been challenging. However, the aforementioned market changes has reduced competition, increased supply, and caused wholesale prices to decline. New technology is available to broaden inventory sourcing options and increased repossessions enhance availability.
Independent operators cannot regain lost market share immediately. BHPH portfolios are best built over time and not overnight! In the New Year, operators are encouraged to benefit from competitor’s underwriting mistakes, not repeat them. Good luck.
Ken Shilson is president of Subprime Analytics () and the National Alliance of Buy-Here, Pay-Here Dealers (). Subprime Analytics uses data mining to perform computerized portfolio analysis for operators and capital providers. NABD is the nation’s largest BHPH special interest group for operators and product providers with more than 13,000 members. NABD will host a National BHPH conference on May 23-25 at Encore in Las Vegas. For more information call (832) 767-4759 or visit . He also can be reached at [email protected]