Capital for the LHPH Industry

Creating financial flexibility one dealer at a time

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:


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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Driving LHPH Into the Future

Kevin Londerholm  |  January 2, 2020 

LHPH Capital hosted its annual LHPH Summit in San Diego at the Hard Rock Hotel on November 8 – 9th, 2019.  Watch as Tim Lawrence, Chief Operating Officer, introduced the purpose of the Summit: to create a platform for LHPH dealers to share best practices and become better operators.  LHPH industry experts were given the opportunity to share their knowledge & lessons learned as they navigated their journey to becoming some of the most successful LHPH Dealers in the nation.  Stay tuned in 2020 as we release highlights from the LHPH Summit which covered topics from importance of accounting, access to capital, sourcing inventory, cash flow, the subscription model, underwriting software, and much more!

 


LHPH Dealership Interview – Markosian Auto

Tim Lawrence | September 3, 2019

“My experience with LHPH Capital has been nothing but 100% positive!” – Nick Markosian

Read more of the informational interview below to find out why this LHPH dealer principal is so pleased they made the switch from a BHPH program.

What was the original catalyst for your transition from BHPH to LHPH? “There were of course the attractive advantages of fewer regulations, easier repos and depreciation, but the actual catalyst was almost going broke during the 2008 recession and needing the cash flow of $600 more per unit from the decreased sales tax.”
Now that your LHPH portfolio is mature, are there any advantages that caught you by surprise? “The recycling of inventory that came back to us every month in a profitable way was a huge surprise.  There were more expired leases and trade-ins than repos so having 50-60% of our inventory as assets already paid for out generating cash flow again made a huge difference.  I think another surprise was the simplicity of the accounting, especially because we didn’t need a RFC.  The only money on your P&L is the lease payment income; whereas with BHPH it’s all smoke and mirrors.”
What is the typical customers response when they hear leasing instead of buying? “First, I’ll say we’ve never had a customer say they won’t do business with us because we offer leasing.  The two biggest concerns are that they won’t own the car in the end or that it might be an exotic scheme to take advantage of them.  We take that as an opportunity to educate them on the differences and benefits to them and then compare the buying cost to the leasing cost.  In the end, they care most about having a lower payment and knowing they have a way out by turning in the car if they have trouble making a payment.”
What were your greatest obstacles during the transition? “Figuring out how to do leasing with our BHPH DMS was by far the biggest challenge.  We just kind of shot from the hip mainly and didn’t realize how important it was to get the right CPA and DMS in place.”
What has been your overall experience working with LHPH? “Nothing but 100% positive.  Terry is incredibly knowledgeable about our business and has trust and faith in us.  I consider Terry a friend and not just someone who lends me money.  You guys are awesome.”

To find out more about the LHPH model and the benefits your dealership can enjoy, please refer to our E-Book, Lease Here Pay Here, Why Do It & How To Launch It

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BHPH vs. LHPH

By: Caitlin Luke & Zanah Naji  | August 19, 2019

Beyond the positive impact of Federal Income Tax deferral and cash flow enhancement from “pay-as-you-go” sales tax, when the Lease-Here, Pay-Here model is compared with the Buy-Here, Pay-Here model, the benefits of leasing for auto dealers are numerous.

Benefit BHPH LHPH
Return on Asset – Original markup of the car
– Interest received on monthly payments
– Life of the asset per dealership: One turn 
– Original markup of the car
– Rent Factor (interest) received in monthly payments
– Life of the asset per dealership: Two to three turns before end of life
– Markup and Rent Factor on each additional turn
Associated Fees for the Dealer – None – Acquisition Fee
– Purchase Option Fee
– Disposition Fee
– Security Deposit
– Excess Mileage Fees
– Excess Wear & Tear
Affordability for the Customer as the Market Price of Vehicles Increases – Credit challenged customers struggle to meet high monthly payment amounts
– Options are buying cheaper cars or extending loan terms
– Higher chance of loan defaulting
– Credit challenged customer has smaller payments than a similar BHPH vehicle
– No need to extend term to keep the payment down
– Better portfolio performance
Inventory Quality – Dealers forced to sacrifice quality of inventory
– Must buy older vehicles with higher mileage
– Faster deterioration of lower quality vehicles 
– Result: Increased service, increased collections, increased repossessions, and reduced profitability 
– Dealer can buy higher quality inventory for same monthly payment to the consumer
– Opportunity to recycle inventory two or three times (sometimes more)
– Result: Reduced service, reduced collections, reduced repossessions, and increased profitability
Competitive Advantage – Low
– Dealers sacrifice quality and profitability to meet customer affordability
– Saturated market
– High
– LHPH dealer able to offer customers newer model and lower mileage at the same monthly payment as an older BHPH car
– No need to sacrifice quality and profitability
Customer Retention – Standard communication when customer makes payments
– At the end of loan, the customer might return to trade the vehicle, or they may pay off the vehicle without communication
– Minimal opportunity to retain
– Communication is increased as customer comes in for both monthly payments and maintenance
– When customer ends their lease, they must return to the dealer with the vehicle
– An additional opportunity to sell the unit for residual, or lease them another vehicle

To speak with a LHPH employee more about the differences between LHPH and BHPH, please contact us at (619) 222-9990 x 1010.

Or download our FREE E-Book and learn more below:

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Top 5 Lease-Here Pay-Here Advantages

By: Kevin Londerholm   October 29, 2018

When talking to dealership owners, managers, and employees at industry conferences and at our San Diego office, we are frequently asked what the benefits are for running a lease-here pay-here program as opposed to a buy-here pay-here program.

Among the numerous benefits that used car leasing can provide a dealership and its customers, we listed the Top 5 Advantages for Lease-Here Pay-Here below:

  1. Federal Income Tax Advantage:The NEW TAX LAW provides a huge tax advantage with the ability to utilize 100% bonus depreciation of used vehicle assets in the first year until 2023. The dealer can defer all up-front profit and may not pay much income tax (if at all) for years to come.
  2. Sales Tax Advantage:Benefit both the customer and the dealer. 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, acquisition fee). The dealer doesn’t lose the entire down payment to sales tax and can be cash positive at the inception of the deal.
  3. Competitive Advantage:Is a direct result of the dealer’s ability to offer the customer a better car for the same payment without losing profit. This allows the dealer to compete with the aggressive subprime lenders and lease much higher ACV vehicles.
  4. Collateral Control:The dealer has ownership of the leased vehicle (asset) and can recover the vehicle easier and often faster because the dealer is named on the title.
  5. Residual Cash Flow:Is the most dynamic aspect of leasing. Once the dealer’s lease portfolio matures and the leases have completed their terms, the dealer experiences an astonishing influx of cash either by leasing the paid off vehicle again or by wholesaling the vehicle.

Our current LHPH dealer clients and their customers enjoy these benefits, among many others, due to offering a leasing program as their main product.

We would love to discuss these advantages with dealers interested in offering a lease-here pay-here program via a phone call (619-222-9990) or email.

If your dealership is already offering used car leasing to your customers, we especially want to hear from you!

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