Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

The Future of Subprime Auto Finance

Trevor Watson | May 4, 2020

As states and localities begin planning for reopening business and getting back to the “new normal,” everyone is wondering what exactly that will look like for auto finance.  This article from AutoRemarketing.com offers some insight.

https://www.autoremarketing.com/subprime/editor-what-will-subprime-auto-finance-resemble-after-crisis

For dealers currently in a position to look three, six, or twelve months down the road, there are a few takeaways.

  • Subprime customers will still need transportation.
  • Lenders are tightening credit standards and potentially exiting the space which will leave many of your customers without an option for traditional indirect financing.
  • There will be fewer opportunities to hang your subprime deals and you will walk more of your customers for the foreseeable future.
  • Now is the time to ensure your in-house program is dialed in and well capitalized to meet the needs of all your customers over the next twenty-four months.

LHPH Capital continues to fund our existing dealers and take applications for new dealers interested in capitalizing their existing LHPH program, or transitioning to LHPH, in anticipation of the future market conditions.

Contact us to discuss how you can benefit from developing and capitalizing a Lease-Here, Pay-Here program.

TWatson@LHPH.com

(619) 222-9990 ext. 1010


From Retail to LHPH

Kevin Londerholm | April 30, 2020

At our 2019 LHPH Summit, many of our most experienced LHPH dealers had the opportunity to discuss their decision to create their own in-house leasing program.  Watch as Nick at Markosian Auto describes how he made the decision to switch from primarily running a retail program to focusing on his leasing program in 2010 – after the last recession.  If you are a dealer looking to start your own in-house leasing program, don’t hesitate to reach out to Trevor Watson, VP of Business Development TWatson@LHPH.com.  We are happy to help guide you through the same process that our LHPH dealers have made while creating their own Lease-Here Pay-Here Program.


LHPH – I Have a CFO and So Can You

Kevin Londerholm  |  March 18, 2020

At our LHPH Summit hosted late last year, LHPH Capital’s owner and founder, Terry Bowdler, sat on a panel discussing the importance of having a Chief Financial Officer (CFO) at your dealership.  Although many independent auto dealers may not have the volume to warrant a full-time CFO, a fractional CFO is the perfect place to begin getting more strategic with your operations.  A CFO will be able to help you generate accurate financial statements and give you greater insight into your dealership cash flow. As the economy heads into some potentially turbulent times, the help of a fractional CFO could help steer your dealership towards a bright future.  Watch the video below & reach out to us if you are interested in seeking the help of a fractional CFO.

 


Lease Here Pay Here – Average Deal

Kevin Londerholm  |  March 2, 2020

At our LHPH Summit in 2019, our VP of Business Development, Trevor Watson, asked our experienced LHPH Dealers what their average lease deal looks like.  The deal structure (term and agreed upon value) is generally based off of the purchase price of the inventory.  As our dealer panel explains, inventory for a Lease-Here Pay-Here Dealer can differ from a BHPH dealer’s inventory due to getting multiple turns on a single vehicle.  This results in vehicles with a higher Actual Cash Value (ACV) purchased from an auction mixed in the lot inventory with vehicles that have been returned to the dealership after a successful lease transaction with a slightly lower value:

  1. Higher ACV: New inventory that has been purchased from the auction may have a term of up to 36 months and may cost the dealer up to $9,000 initially.
  2. Lower ACV: A vehicle that has successfully run the term with an original lessee is returned back to the dealership, reconditioned, and re-leased to another customer.  The second or third lease on the same vehicle would most likely have a shorter term with a lower agreed upon value.

Whether the vehicle is new to the lot or it is recycled inventory, the goal for our LHPH dealers is to lease vehicles to their customers that will successfully run the length of the lease term.  Check out the video of our dealers explaining their deal structure below:

 


Lease Here Pay Here – Inventory Sourcing

Kevin Londerholm  |  February 12, 2020

When an independent auto dealer begins researching the benefits of creating a Lease-Here Pay-Here Program, one of the most intriguing benefits is the increased profitability from creating greater Return on Asset (ROA).  When a lease-here pay-here deal matures, the dealer can still retain the asset at the end of the customers lease contract.  This provides the dealer with the option to either re-lease the same vehicle again or sell the vehicle at auction.  Re-leasing the vehicle creates additional profitability as a second stream of payments is generated on the same asset with a new customer.

Therefore, successful LHPH Dealers approach the sourcing of their vehicle inventory with the intent to lease a vehicle to two or even three customers during the useful life of the asset.  This mindset of creating the greatest Return on Asset begins with the vehicle purchase for the dealer.  Check out how Nick Markosian (featured at the LHPH Summit 2019) approaches the sourcing of his LHPH inventory below:


Lease Here Pay Here Dealer Panel

Kevin Londerholm | January 14, 2020

Every year at the LHPH Summit, our Lease Here Pay Here Dealers reflect on the progress they made in achieving the goals they laid out for their dealerships.  Examples of some goals include revamping their underwriting procedures, opening a new location, increasing portfolio size, or decreasing net charge offs. The goals created by our LHPH Dealers are measurable and they use their weekly team meetings throughout the year to keep their staff focused on the right areas within the business.  Creating a platform at the LHPH Summit to openly discuss past success and/or shortcomings allows the dealers to hold themselves accountable and receive valuable advice from their experienced peers in the industry.  Tim Lawrence, LHPH COO, presented the Dealer Panel in the short video below.  Stay tuned as we highlight our LHPH Dealers and the progress they made in achieving their dealership goals!


How to Reduce Your Average Term with Lease-Here, Pay-Here

Trevor Watson | January 8, 2020

Anyone familiar with Auto lending, and particularly with subprime auto lending, knows that one of a lenders’ greatest risks is the term they put their loans out at.  The longer the average term, the higher their frequency and severity of loss will be.  It makes sense, the lender is providing financing to individuals with poor repayment history, and the longer the individual has the loan for, the more opportunities for life events and/or vehicle breakdowns to take place, resulting in default.  Severity of loss is also impacted by the term, since the principal balance of the simple interest loan reduces slowly toward the beginning of the loan and accelerates toward the end.  Meanwhile, the vehicle depreciates the entire time.  This means defaults in the first half of the loan typically result in larger losses than defaults in the last half of the loan.  Therefore, the longer your original term, the longer your exposure to the first half of the loan.

The challenge the Buy-Here, Pay-Here industry has encountered over the last decade is the price of vehicles has continued to rise steadily.  Numerous factors have played a part, the lack of new vehicle production during the Great Recession, Cash for Clunkers removing existing supply, regulation and market demand pushing new safety technology and MPG efficiency – driving new car costs higher, among other market factors.  The result is the traditional “perfect” BHPH car of $10,000 or less is not only harder to come by, it is now an older model year vehicle with higher miles than it was just 5 years ago.

In addition, the BHPH dealers’ customers have not seen their incomes grow at the same rate as the cost of used cars.  This has left BHPH dealers in a struggle to put customers with relatively thin incomes into ever more expensive cars or opt to purchase older vehicles with higher miles that come with additional mechanical issues and breakdown far more often.

The result from the steady price inflation (not unlike New car financing) has been dealers resorting to extending the terms of their Buy-Here, Pay-Here notes in an effort to keep monthly payments in an affordable range.  According to Subprime Analytics, the average term of a BHPH note has increased over 7 months in the last 8 years to an astounding 43 months in 2018 (44 months in 2017).  Attend any BHPH conference and the conversation is constantly around bringing terms back down.  Everyone seems to know extended term is injecting risk and losses into their portfolios, however, no one seems to know how to solve for the challenge.

Here is where Lease-Here, Pay-Here offers a solution.  By using a lease instead of the traditional Retail Installment Sales Contract (RISC), a dealer can introduce a residual value into the calculation.  In the following diagram, you will see a comparison of a LHPH deal on a $12,000 vehicle with a 20% residual versus a BHPH deal on a $12,000 vehicle with a traditional loan.  Both deals are at 36 months and both at a 24% interest rate (or IRIL – interest rate implicit in the lease) and you can see the corresponding monthly payment for the customer.  The lease offers a base payment nearly $100 less per month.

The BHPH deal would need to extend its term out to 50 months to get a payment in the neighborhood of what the lease can offer at 36 months.

This example is merely scratching the surface.  What if you have a particularly strong unit that may have a 25% or 30% residual?  You could either, offer the customer an even better payment or shrink your term to 30 or 24 months and their payment would remain the same.  Alternatively, the LHPH dealer could offer the customer a $15,000 vehicle on a 36-month lease and have a payment still less than what the BHPH dealer is offering on their $12,000 car.  That $15,000 car is likely a year or two newer and with lower mileage than the BHPH dealer’s vehicle.  On aggregate, this will likely translate in to fewer mechanical failures and better overall portfolio performance.  Not only does this present a competitive advantage for the LHPH dealer, it does so while reducing average term length in the portfolio.

There are solutions to the term challenges the BHPH industry is currently experiencing in the face of increasing used car costs.  The key is thinking outside the RISC box and understanding the flexibility a lease model can offer to reduce term and the associated risk.

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A BHPH Veteran Operator talks to AutoRemarketing about LHPH

Trevor Watson | December 2, 2019

Gene Daughtry has over 20 years of Buy-Here, Pay-Here experience.  Hear his thoughts on Lease-Here, Pay-Here and the opportunities LHPH can offer for both independent and franchise dealers.

https://www.autoremarketing.com/bhph/podcast-daughtry-tips-help-dealers-all-sizes 


BHPH vs LHPH Benchmarks

Trevor Watson | November 25, 2019

Interested in how Lease-Here, Pay-Here dealers stack up to their Buy-Here, Pay-Here peers?  Here is a comparison of recent benchmarks between the two models.  In 2018, LHPH dealers were rolling larger dollar vehicles, on leases that were eight months shorter in term, with the same monthly payment as the average BHPH dealer.

In subprime lending, you need to keep your terms as low as possible to reduce your risk, while still keeping the customer’s payments affordable.  LHPH provides the financial instrument to do just that.


Thirty Leases Per Month with Two Turns of Your Fleet

Tim Lawrence | October 29, 2019

One of the numerous advantages of Lease-Here, Pay-Here compared to BHPH is the recycling of inventory.  Unlike BHPH, with the lease, the dealer’s vehicle will come back to the dealership when the lease matures to be reconditioned and returned to the lot to be leased out again.

In the video below, you will see how a dealer leasing 30 units a month experiences a dramatic surge in cash flow and profitability as their portfolio matures and they begin recycling their fleet.

To learn more about this and all the other benefits Lease-Here, Pay-Here can offer your dealership, download our free E-Book here.

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