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 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 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!
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!
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 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.
Eyo Toe | January 13, 2021
How can you identify actual cash flow in your financial statements? Chad Martin, Fractional CFO and Consultant at Martin Consulting and Management, talks about some of the non-cash items that are part of financial statements and some useful tips on accounting for the differences in cash and non-cash items
Eyo Toe | January 11, 2021
What is the best way for a dealer to forecast cash flow?
A resource that is used commonly in the auto finance industry is a 13-week cash flow model. This model demonstrates about a quarter’s worth of inflows and outflows and is valuable for strategy sessions and determining a dealership’s health as a company. The forecast is broken down into weekly reports, as opposed to monthly, allowing you to picture short term variability and giving you an opportunity to investigate details should any unexpected shortfalls arise.
Forecasting cash flow is much more than taking last year’s cash flow and dividing it by 12. Be sure to incorporate your current metrics and KPIs into a model that works best for you. For example, when you are in a growth scenario you will want to consider certain aspects such as upfront costs, increase in employees, etc. and implement them into your model to get the most accurate forecast.
Cash flow is critical for any dealer, whether they are focused on retail, BHPH, LHPH or a mix.
Have additional questions? Contact Trevor Watson at TWatson@lhph.com.
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 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!