Underwriting Guidelines for the Lease Here Pay Here (LHPH) Lessor

Bill Elizondo | April 1, 2022

As of today, if you have vehicles, or still have a good source to get vehicles, your business is probably continuing to thrive. This opportunity to grow can only pay dividends if you have the effective underwriting.

So, what is effective underwriting and how do you grow smartly? It is best to find the specific underwriting guidelines that work for your business, but here are some general underwriting guidelines that tend to work well for all.

1. Keep your term short.
Most customers in leasing look to get out of their current vehicle in two years or less. In fact, many even enjoy the opportunity for an early buyout.

2. Make the payments affordable. Most customers can typically afford a payment that is 25 percent of their net income. If they have a higher disposable income, then that percentage can fluctuate.

3. Set minimums for job time – this could be as little as one month depending on the previous job history. If the customer was in the same industry and moved to take on a better opportunity then that would work if they had 6 months or more. If it’s a new job to the customer then normally 6 months at the job is a good rule to follow.

Residency can also be a short time depending on if they lived in the area or they moved to a more affordable residency. Reviewing all their documents and getting proof of residency will be important especially if it is less than 6 months.

The key in both of these is asking questions and gathering information. The more you know about their reason for working in a particular job or living in a certain area the better equipped you are to make a good loan decision.

4. Verify your customers' information.This is a crucial part of our business. Not knowing if the information is correct or current only allows for potential issues, losses and costs in the future.

With the prices of vehicles as high as they are now, Lease Here Pay Here has become a more viable option because you can still underwrite a customer for a two-to-three-year term at the same payments that you offered to your customer 12 months ago. However, they will have a larger residual at the end of the lease.

Seeking a larger down payment to compensate for your underwriting guidelines is more of a miss than a hit. It is hard to pass up $2000, $3000, or $4000, but if you sideline your guidelines, you might have a lost car or skip work that takes more time to manage. 

Instead, set up the expectations with your customer using your underwriting guidelines. The one thing you can do to effectively mitigate this risk is set your customer up for success by speaking to them like you would want to be spoken to. Give them the truth about what they can afford or what they qualify for. They will appreciate your honesty, and you will have fewer defaults for the next couple of years.  

LHPH offers many advantages for you and your customers. Prices are high on vehicles, but with the option of having a 20-40 percent residual, you can still make the payments affordable for your customers and not put them into a long-term contract.

If you have thought more about doing LHPH because of better repossession opportunities and leases not being included in bankruptcies* here are a few more reasons to add to that list:

  • Sales Tax Deferred In 31 States
  • Down Payment Can Be Security Deposit – Eliminating Sales Tax Liability
  • Consumer Lease Agreement & Reg. M Disclosure Requirements More Forgiving Than TILA & Reg. Z
  • Depreciation Deduction
  • Reduced State and Federal Regulatory Requirements
  • More Flexible Deal Structure
  • Retain Ownership in the Vehicle
  • Potentially Greater ROI Over Conventional BHPH Financing
  • Staying Competitive

* Always confirm with your legal advisors

In conclusion, LHPH programs present viable option for your customer. Ultimately though underwriting will determine the overall long-term success of your dealership. Consistent underwriting will also determine the long-term success of your customer.

Learn more about Lease-Here, Pay-Here the the 2022 NIADA Convention or Virtual LHPH Workshop led by Bill Elizondo, industry expert and NIADA Dealer 20 Group Moderator.