Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

LHPH E-book 2021 Edition

Eyo Toe | April 6, 2021

LHPH Capital has updated our E-book with industry benchmarks, dealer resources for a successful LHPH program, and more! Our E-book is a great resource when learning about the benefits of leasing and how to make a leasing program best fit your specific needs at your dealership. Find the link to the FREE download here!


How Are Used Car Price Increases Affecting Dealerships?

Eyo Toe | March 15, 2021

 

Manheim posted an update on used car prices this week. Their Vehicle Value Index reports that the used vehicle market continues to be competitive as prices soar YOY and even from the previous month. Manheim reports that in February, the used car value index increased 17.9% YOY and 3.79% from January.

How do dealers combat the challenges of increasing used car prices and the affordability aspect for their subprime customers? There are a few options when looking at the long-term effects of increased car prices.

One option is to extend the term of the retail installment sales contract in order to sustain an affordable monthly payment for the consumer. Although this may seem like a quick fix, historically data has shown that a longer term is correlated with increased delinquency and charge offs. When planning for the long-term financial health of your dealership, extending the average term of your notes is risky and could have negative effects on the financial performance of the dealer’s portfolio.

Another option to consider is adopting a leasing program. Leasing is incredibly resilient in a fluid market like the used car industry because it allows the dealer to adjust the many variables of a lease contract including, but not limited to, the agree upon value, interest rate implicit in the lease, residual value, acquisition fees, and more. This flexibility allows you to customize a lease contract for your customer even as used car prices increase without lengthening the term.

LHPH programs are encompassed around the fact that consumer affordability is directly related to dealer profitability. When you are offering your customer a newer, more reliable car for a payment they can afford, it is more likely your customer will successfully complete their lease and you will retain their business for future vehicle leases.


Lease Variables

Eyo Toe | March 10, 2021

The way leases are structured allow the dealer to adjust many different variables in the contract ranging from agreed upon value to the residual value. Learn all about these different variables in this video!

 


How To Set Residual Values?

Eyo Toe | March 8, 2021

Setting residuals has a stigma of a risky and complicated process due to the new car leasing industry. With used car leasing, residuals are one of the parts of the lease contract that the dealer controls. Setting residuals correctly plays an important part in maximizing the profitability of a vehicle by leasing it for 2-3 full term leases and the selling the car at auction at the end of its lifecycle.

This infographic shows three ways dealers can go about setting residuals. For lower ACV cars, 20% of the agreed upon value is a standard residual calculation which maintains compliance with Reg M (10% residual of the ACV) and ensures the car will be worth at least that value at the end of the lease.

Higher ACV vehicles   allow for the residual to be set at a value which allows the customer to maintain an affordable monthly payment (~$400-$500), without extending term. With a term of 24-36 months, research shows that 30-45% of the car’s value is a safe estimate for the residual value on a higher ACV vehicle.

Lastly, Manheim Market Report (MMR) is a tool that dealers can use to give an accurate estimate of the future car value after the consumer has leased it by adjusting estimated milage, car color, make and model, and more.

Keep in mind, with a well-constructed LHPH program, the goal is to lease out the same vehicle two, three, even four times on full-term leases before you liquidate the asset.  When you are successful in turning these vehicles through multiple full-term leases, if you miss the last residual setting by a few hundred dollars, the vehicle will have already generated a substantial profit for the dealer over a number of years.  Done correctly, residual setting is not a significant risk for LHPH dealers.

If you have additional questions, please reach out to Trevor Watson at TWatson@LHPH.com.


Lease Contract vs. RISC?

Eyo Toe | March 1, 2021

In today’s market, consumers have access to multiple sources of information which allows them to have access to car models, prices, features, etc. from numerous BHPH dealers in their area. In addition to these changes, COVID-19 has also affected consumer behavior in how they are buying or leasing cars. While competition among dealers is constantly growing, BHPH dealers will need to find a way to differentiate themselves. Leasing gives dealerships a competitive advantage that benefits the dealer and the consumer as well.

Leasing offers dealers several benefits that allow them to gain a competitive advantage. Lease fees are one of the benefits that set apart leases and retail installment sales contracts (RISC). These fees include acquisition fees, purchase option fees, disposition fees, security deposits, excess mileage fees, or excess wear and tear fees. Leasing also allows the dealer to give the asset more than one turn in its lifecycle due to the consumer almost always bringing the car back allowing for additional cash flow with each turn.  Due to the ever-increasing price of used cars, BHPH dealers often have to sacrifice the quality of their inventory in order to keep monthly payments affordable for the customer.  However, thanks to the residual in a lease, the dealer can offer the customer a newer more reliable car for the same monthly payment without extending term resulting in better portfolio performance. Lease contracts are much more flexible than a RISC because the dealer controls the residual value, contract term, money factor (interest rate), and fee structure.

Lease contracts can also provide numerous benefits for the consumer. As mentioned above, the consumer is able to get a more recent model of the vehicle which is much more dependable for the same payment as they would in a RISC with an older higher mileage car. Depending on the term, the consumer will be able to lease a new car from the dealer every 24-36 months or buy their current car for the residual value. In addition, many LHPH dealers provide loss damage waivers and service contracts built into the rent, adding value and peace-of-mind for the lessee.  Similarly, many dealers provide maintenance on the vehicle to ensure the asset is well kept and available to be leased again when the current lessee’s lease matures.


Simple Guidance for You in Daily KPIs

Eyo Toe | February 10, 2021

It can be a challenge for you to figure out which KPIs to track and how often they should be measured. Specifically, which should be recorded daily. Each dealership is unique in what data they should collect to best assess their strategy in reaching their goals. Kevin Franks gives many great examples of what daily KPIs he uses and why!

 


Want To Learn More About Cash Flow?

Eyo Toe | January 28, 2021

This month we have talked about the importance of cash flow and the differences you will see when transitioning from BHPH to LHPH. Our 2020 LHPH Virtual Summit had some great panelists who have experience in operating lease accounting and gave insight on the topic of cash flows.

Fill out the form below to download the FREE full length webinar and learn from from LHPH professionals!


Charge Off Best Practices

Eyo Toe | January 27, 2021

Charge offs are not a desirable outcome to any contract agreement but unfortunately, they do happen. When a car is leased is moves from an asset to a leased asset, what does this mean if the vehicle becomes a charge off? Learn more in the video below!


What Does Received Cash Look Like in LHPH vs. BHPH?

Eyo Toe | January 20, 2021

Leasing programs book cash differently that typical BHPH accounting methods. When a vehicle is leased, each payment that comes in from the customer is considered revenue in the accounting world. Although BHPH accounting may show a large note on their books, in reality, they have only received one month’s payment from the consumer. Learn more in the video below!


Why Should You Switch to Operating Lease Accounting?

Eyo Toe | January 18, 2021

LHPH Capital is a firm believer that the leasing model is beneficial for all stakeholders involved. If you are a current BHPH dealer looking to convert to a leasing program, you should expect some changes in what your cash flows will look like from an accounting standpoint. Leasing uses operating lease accounting which allows you to receive the many tax benefits of LHPH depreciation on your portfolio and other federal income tax benefits. Because there is no need for a related finance company, you will save money on administrative fees and reap the benefits of tax deferment.

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