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 | 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.
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!
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 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.
Eyo Toe | December 22, 2020
As 2020 comes to an end, many people are beginning to look back and reflect on this past year. If this year has taught us anything, it is the value of relationships and ability to be resilient. Customer retention is one of the many benefits of having a Lease-Here, Pay-Here program as it gives dealers a number of opportunities to build relationships with customers through their lease contract and even when that contract comes to an end. During the lease, the customer will bring in the vehicle for maintenance and will communicate during transactions and collections.
Post lease, many dealers will provide trade up incentives even before the lease contract expires. With BHPH’s retail installment contract, a customer can go to any dealership and trade their car in. But, with LHPH, the customer is required to bring back the vehicle giving the dealership an opportunity to lease them a new car or sell the customer the car for its remaining residual value. These are some of the ways dealers can develop customer loyalty with an LHPH program.
Eyo Toe | December 21, 2020
One of the most recognizable faces in Lease-Here, Pay-Here is Nick Markosian, CEO of Markosian Automotive in Taylorsville, Utah. Nick has been in the car business for 30 years and has run a successful retail and BHPH business through his three locations. In 2017, Nick made the transition from BHPH to LHPH and he never looked back. He is now up to 3,000 accounts in his portfolio and continues to grow in a steady, sustainable, and profitable fashion.
Learn more about his reasons for making the transition by reading this recent article about him in the December 2020 addition of BHPH Dealer magazine:
And hear Nick explain some of the benefits of LHPH in this clip from the 2020 LHPH Virtual Summit:
To learn more about Lease-Here, Pay-Here and how to make the transition from BHPH, download our free E-Book here: