Black Book Projects Lower Supply and Higher Valuations on Used Cars for Next Four Years
Trevor Watson | October 1, 2020
This week, Black Book released their projections for used car supply and the impact on used car valuations over the next four years and their forecast looks like more challenges ahead from a consumer affordability perspective.
According to Black Book, “…with the reduction in retail and fleet sales over the next several years, we project a substantial decrease of available used inventory in the years to come. The graph above illustrates the numbers of returned vehicles up to 8-years-old. This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations.” Read the entire article here: https://www.blackbook.com/covid-19-market-insights-9-29-20/
While this supply constraint will be “beneficial to used car prices,” that translates into higher priced vehicles for consumers resulting in higher monthly payments. In today’s environment, higher monthly payments, particularly for subprime customers will inevitably translate into higher delinquencies and charge offs for BHPH dealers. Many BHPH dealers will attempt to mitigate the price increases by extending the term of their retail installment sales contracts (RISC) to keep the monthly payment in an affordable range. However, extending the average term on your BHPH notes actually injects additional risk and results in higher losses over time.
The solution to the affordability challenge with ever increasing used car prices is to utilize a lease instead of a retail installment sales contract. Thanks to the residual in the lease, a Lease-Here, Pay-Here dealer can offer a smaller payment on a higher priced vehicle than a BHPH dealer can on a RISC. In the graphic below, you can see the difference between a lease contract and a BHPH contract on a $12,000 deal. Both deals are at 36 month terms and the same interest rate, however, the lease payment to the consumer is nearly $100 less per month.
This is another reason why, for dealers who are looking 2-3 years down the road, LHPH is the right model to pursue.
Learn more about the benefits of Lease-Here, Pay-Here by downloading our free e-book here: