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.
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!
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.
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!
Eyo Toe | January 6, 2021
Start the new year with growth and profitability and make the most of your assets by adopting a Leasing Program! With BHPH programs, dealers sell used vehicles for a monthly payment until the receivable has been paid off. LHPH programs allow dealers to buy newer, nicer cars and lease them to two or even three customers, significantly increasing the amount of profit made on each car. In addition, dealers are maintaining steady cash flow throughout the lifetime of the car, keep all down payments from each lessee and enjoy the residual cash flow once the car has reached the end of its lifecycle.
Check out this infographic explaining how the return on assets in a leasing program is profitable and competitive.
Have additional questions? Contact Trevor Watson at TWatson@lhph.com.
Kevin Londerholm | October 27, 2020
Used car leasing offers an answer to the challenge of affordability and performance. Thanks to the incorporation of the residual value in the lease, a LHPH dealer can offer the same monthly payment on the lease of a vehicle with a $11,000 agreed upon value as a BHPH dealer can offer on a vehicle with an $8,000 sales price. Both deals provide the consumer the same monthly payment and down payment, with the same 36-month term. However, the LHPH dealer can offer a newer vehicle, with lower miles, likely to last the entire term, and result in better portfolio performance over time.
See below as Joe Segrave, Owner of Benchmark Auto Sales, describes how important affordability is for the customers he serves.
Kevin Londerholm | October 13, 2020
Thinking about switching from BHPH to LHPH?
Most are familiar with the Buy Here Pay Here (BHPH) business model where a dealership sells a vehicle to a consumer and provides the financing on a traditional retail installment sales contract (RISC) for a specific term and APR. The dealer then services the installment loan through its life.
LHPH is similar to BHPH, however, the key difference with LHPH is that the financial instrument offered by the dealership is a used car lease rather than an installment loan.
Changing the approach from SELLING vehicles to LEASING vehicles may seem daunting at first, however, there are some key similarities between the two business models that make the conversion simple for the dealership staff & operations.
Watch below as Tim Lawrence, COO touches on many of these similarities. The conversion from BHPH to LHPH is easier than you think!
Kevin Londerholm | September 30, 2020
What is the difference between Lease-Here Pay-Here and Buy-Here Pay-Here?
Watch below as George Klinke, our EVP Business Development, clearly explains the different models for independent auto dealers to either SELL or LEASE their vehicles.
BHPH = Retail Installment Sales Contract, ownership of the vehicle is passed to the consumer
LHPH = Lease Agreement, the Dealer retains ownership of the vehicle while the customer makes a certain number of payments to use the vehicle
As George explains, the LHPH customer is given the option to either buy the vehicle at the end of their lease OR turn the vehicle back into the dealer and lease a different vehicle. This flexibility in the LHPH Product is one of the many benefits both the dealer and the customer will get to experience with the Lease-Here Pay-Here model.
Contact us today if you would like to learn more about the LHPH Model! email@example.com or 619-222-9990
Eyo Toe & Kevin Londerholm | September 14, 2020
Watch below as Terry Bowdler, Founder & CEO of LHPH Capital, explains the Sales Tax Advantage that LHPH has over the BHPH model. With traditional Buy Here Pay Here lending on retail installment sales contracts (RISC), state sales tax is paid at the time of the transaction on the sales price of the vehicle. This means the dealer uses the entire down payment for sales tax and is immediately cash-negative at the inception of the deal.
For LHPH deals in “pay-as-you-go” states, the sales tax is calculated only on the actual monies collected by the dealer (i.e. down payment, first payment). Sales tax is then remitted to the state on each lessee payment received for the remainder of the lease. With this structure, the dealer can pay sales tax over time, rather than all up front. This helps dealers start loans on a cash positive basis, requiring less capital to growth the business as well as better unit economics throughout the life of the lease.
Trevor Watson | September 8, 2020
Is your LHPH program prepared to capitalize on today’s market conditions?
According to Experian’s State of the Auto Finance Market for Q2, 2020, subprime loan originations fell to record lows as lenders mitigate risk in their portfolios by tightening credit standards in higher risk buckets. This leaves many consumers without traditional financing sources.
It also opens an opportunity for LHPH dealers to drift up the credit spectrum to capture more customers with higher quality than they have over the last decade. You can see the trend is just starting with BHPH gaining 90bps in market share over Q2 2019.
Contact us today to learn more about Lease-Here, Pay-Here and the LHPH Capital funding program.