Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

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.


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.


New Year, New Opportunities!

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.


Why Make the Transition from BHPH to LHPH? 

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 

https://www.omagdigital.com/publication/?m=53981&i=683961&p=18 

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: 

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LHPH: Affordability and Performance

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.


Converting from BHPH to LHPH

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!


Black Book Projects Lower Supply and Higher Valuations on Used Cars for Next Four Years

Trevor Watson | October 1, 2020

This week, Black Book released their projections for used car supply and the impact on used car valuations over the next four years and their forecast looks like more challenges ahead from a consumer affordability perspective.

According to Black Book, “…with the reduction in retail and fleet sales over the next several years, we project a substantial decrease of available used inventory in the years to come.  The graph above illustrates the numbers of returned vehicles up to 8-years-old.  This lower level of used inventory will be beneficial to used car prices as supply will be limited, helping to bolster valuations.”  Read the entire article here: https://www.blackbook.com/covid-19-market-insights-9-29-20/

While this supply constraint will be “beneficial to used car prices,” that translates into higher priced vehicles for consumers resulting in higher monthly payments.  In today’s environment, higher monthly payments, particularly for subprime customers will inevitably translate into higher delinquencies and charge offs for BHPH dealers.  Many BHPH dealers will attempt to mitigate the price increases by extending the term of their retail installment sales contracts (RISC) to keep the monthly payment in an affordable range.  However, extending the average term on your BHPH notes actually injects additional risk and results in higher losses over time.

The solution to the affordability challenge with ever increasing used car prices is to utilize a lease instead of a retail installment sales contract.  Thanks to the residual in the lease, a Lease-Here, Pay-Here dealer can offer a smaller payment on a higher priced vehicle than a BHPH dealer can on a RISC.  In the graphic below, you can see the difference between a lease contract and a BHPH contract on a $12,000 deal.  Both deals are at 36 month terms and the same interest rate, however, the lease payment to the consumer is nearly $100 less per month.

This is another reason why, for dealers who are looking 2-3 years down the road, LHPH is the right model to pursue.

Learn more about the benefits of Lease-Here, Pay-Here by downloading our free e-book here:

 

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New and Used Inventory Crunch – How LHPH Helps

Trevor Watson | June 23, 2020

Every dealer is feeling the impact of the very unique market conditions brought on by the pandemic.  The statewide closures, injection of stimulus funds, moratoriums on repossessions and lease return extensions, combined with pent-up demand have thrown the used car market into whiplash.

Here is an excellent article that dives into the details of the current used (and new) car supply squeeze:

https://dealercenter.cargurus.com/blog/new-and-used-vehicle-inventory-drying-up-due-to-covid-19/

How LHPH Helps Dealers During Supply Challenges

This unforeseen situation has shined a light on an additional benefit of having your own Lease-Here, Pay-Here program:  Recycling of Inventory.  We often promote recycling of maturing leases from your portfolio as a significant advantage of LHPH from a profitability perspective, and it is.  However, the additional benefit of having a mature portfolio of leases with numerous lease returns coming back to each month is:  free inventory.

For dealers who have developed their LHPH program over the last few years, they have 10, 20, 30 cars coming back onto their lots each month, without having to buy those vehicles in the market.  These cars are debt-free, no flooring or lines of credit debt and fees weighing their operations down.  These dealers are not paying $2,000 over book to win the vehicle from their competitors on the block.  Many are still buying additional vehicles for the inventory right now, but they can be selective, thanks to their guaranteed flow of lease returns each month.

Of course, growing and maintaining a lease portfolio to the maturity point takes time, discipline and dedication.  Dealers who may read this and think, “that doesn’t do me any good at this moment,” should remember, we have now seen two significant supply crunches in the last 12 years alone.  With little doubt, there will be more of these events at some point in the future.  Preparing now and building your lease portfolio will allow you to ride out the natural fluctuations of the future used car market, whether those are large or small.

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