Risk or Opportunity?

By Eric S. Hurst, EVP, COO, National Lenders General Agency, LLC

My recent travels allowed me to meet numerous Buy Here-Pay Here dealers in various states. A few consistent themes became apparent. “My insurance cancellations are higher than I have ever seen.” “Down payments are a third of what they were last year.”

“Sales have slowed dramatically.” “The cost of everything is through the roof!” While many of us have been through these cycles numerous times, this one contains some notable differences.

Listen, I’m not an economist. I won’t quote financial stats. But as a 30-year practitioner of the auto industry and a student of trends to manage ahead rather than from behind, I can share some observations and best practices I’ve learned over many years to do just that.

Insurance Cancellations – an ominous sign:  Pay very close attention to this statistic in your related finance company – it’s one of the leading indicators of losses to come. Why? Insurance for many clients in the BHPH portfolio is considered a luxury.

Every day, choices are made: go to work, get paid, eat, make the car payment, rent payment or utility payment. Notice what’s missing? You guessed it – the car insurance payment.

With today’s high inflation and gas prices, paychecks don’t go as far for most as they did before. That’s scary news for lenders, as contracts are exposed. Many lenders have sought solutions to mitigate risk, including CPI, VSI or even debt cancellation programs. All are tremendous solutions.

Rising DQ: How often do you review your GPS activity reporting? Is the mileage suddenly excessive? Maybe your customer took on some part-time work as an Uber or DoorDash driver. How fast will that reduce the collateral value with excess miles? Did the car not move for days or even weeks at a time? Is it broken down?

Did your customer lose his job and his need to go anywhere declined? Behavioral data is a leading indicator of cancellations. It puts you on the phone long before the payment is due. A proactive versus reactive response allows you to be a partner or problem solver rather than a problem chaser.
 
Seek risk mitigation solutions: As for the down payment situation and sales volume, make every deal count.

Several dealers, I met over the past few weeks referenced how their CPI programs have helped them retain high down payments and get more comfortable carrying additional risk, knowing they carry programs that generate additional revenue and protection.

With rising rates, generally, the view margins with higher capital costs reduce and often eliminate risk tiers for many lenders.

For those in the BHPH-related finance business, it always means more opportunities
with the kind of higher quality customers, we might not have seen for a while.

Dial in your underwriting view: The profiles begin to change. If your model relied heavily on down payment to score higher, you could be missing out directly with a higher quality customer and a lower down payment.

Watch for a short-term problem from what was an otherwise very worthy risk in the past.

Great entrepreneurs become wealthy during trying times because they identify and use intelligence to distinguish risks and opportunities. 

This article appeared in the August 2022 Issue of BHPH Dealer Magazine.  Read the publication here.