BHPH: To cut repos and charge-offs, you have to spot the ‘credit criminals’

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By Mark Dubois

If you are in the Buy Here, Pay Here (BHPH) or Lease Here, Pay Here (LHPH) business, then you already know that repossessions and charge offs are a fact of life in the special finance business.  

The target audiences for a BHPH business are customers who have poor credit, customers who have no credit, customers who are trying to rebuild their credit or customers who are on a fixed income.

The reason for their credit circumstances could be the result of a job loss, a recent divorce, a business failure, or they are new to the country.  These are not bad people; they are just people that need help to rebuild their credit worthiness.  

One common mistake made by dealers is thinking the BHPH business targets the worst possible credit worthy customers, sometimes called “credit criminals.” This is clearly not the case.  

One of the keys to success in BHPH is being able to tell the criminals from the people who have a genuine intention to repay their car loan and re-establish their credit.  

Recognizing the difference is accomplished by sound underwriting and thorough verification of important information on the customer’s loan application. Having noted that, a dealer in the BHPH business must still have an appetite for risk and a tolerance for loss within in their loan portfolio.

Successful BHPH dealers understand they are in the finance business not the car business as we know it. Using their own capital, they finance loans to customers with impaired credit.

These dealers also understand they are in the collections business, not the sales business. Carelessly approving loans just to hit sales targets could result in bankrupt and put you out of business.

The key to minimizing repossessions and reducing charge offs is to hire staffers  who have the right skills for the BHPH business and then provide BHPH specific training so they understand how to properly structure loans and effectively collect on those loans.  

It is likely that a high percentage of your BHPH customers will miss a payment or make only a partial payment several times during the term of their loan. By their nature, many BHPH customer are not good money managers and do not have any savings.  

When unforeseen expenses come up such as an unusually high electric bill or being short on their paycheque because of lost hours due to an illness, they are just not prepared for the problem. In many cases, the customer has to make choices about what bills they can afford to pay.  

Successful BHPH dealers believe that most people are good people, and these people want to do what is right.  Helping these customers through a difficult time by accepting a partial payment or spreading the delinquent payment over the next two or three payments can create positive customer relationships in addition to repeat and referral business.

However, before your customers start to think that any excuse will get them a payment extension, you need to establish a firm policy that requires all customers to provide verification for why they can’t make their payment in full and on time.

The required verification should be provided before any discussion of a payment extension will be considered.

For example, a customer must be able to produce a bill to verify the higher-than- usual electric bill, or a pay check stub to verify they were short paid due to loss of hours, or a receipt to verify the prescription medicine they bought for a sick child.  

You want your customers to understand that you will work with them if the problem is legitimate. Requiring your customers to verify the reason will eliminate a lot of the story telling and excuses.

In order to bring their account current, the next step is to agree on a payment arrangement that is fair to the customer and reasonable for you. All payment arrangements should be made in writing with specific details on dates and amounts agreed to. Have the customer and the dealer or manager sign this payment arrangement Give the customer a copy.

Remember, repossessions and charge-offs are a fact of life in the BHPH/LHPH business.

However, without BHPH specific training on deal structure and underwriting a dealer can create what I call self-inflicted wounds by approving loans to credit criminals or to customers who are outside your tolerance for risk. Even the best collections team will be fighting a losing battle under those circumstances.

Mark Dubois is the president of Dealer Performance and Consulting, LLC who acts as a consultant, trainer and 20 Group moderator in the Buy Here, Pay Here industry in the U.S. and Canada. For more information, email him at dealerperformance@verizon.net or 941-729-2357