Automotive News - February 11, 2008 - (Page 70) 70 • FEBRUARY 11, 2008 finance & insurance Buy-here, pay-here plans may attract more dealers Growing customer base, higher standards may outweigh risks Rosland Briggs Gammon autonews@crain.com At the 103 DriveTime used-vehicle dealerships across the United States, buyers with less than stellar credit scores still have an opportunity to drive away with a used vehicle. That’s because DriveTime finances 99 percent of its car sales itself. With about 65,000 cars and trucks sold in 2007, it’s the largest buy-here, payhere dealership group in the United States, according to the National Alliance of Buy Here, Pay Here Dealers. Buy-here, pay-here dealerships specialize in selling older vehicles to consumers with bad credit. The dealerships finance the loans in-house instead of turning them over to outside lenders. Because the loans are riskier, the dealerships charge higher interest rates than other stores. Rates average between 12 and 25 percent to people whose credit scores don’t qualify them for traditional financing. As lenders tighten their credit standards and the subprime mortgage industry fallout increases the number of people with blemished credit, more buyers may be headed to buyhere, pay-here dealerships to purchase cars. And with average profit margins of 15 percent compared to 2 percent for new cars, according to the alliance, the buy-here, pay-here model may become a more attractive option for dealers. Used-car dealership Credit Country Motors in Summerville, S.C., launched a buy-here, pay-here operation about a year ago, says Stan Borkowski, the dealership’s treasurer. Buy-here, pay-here now represents about 20 percent of total sales. “We were looking to generate another stream of revenue,” he says. “We’re taking a risk, but we want them (customers) to grow and get into our newcar franchises down the road.” Credit Country operates three newcar dealerships in South Carolina: McElveen Pontiac-Buick-GMC-Hum- J.D. Byrider, which offers customers buy-here, payhere plans, is committed to building consumer trust, says spokesman Jim England. Last year, it issued a manual that provides dealers legal guidelines and standards for advertising. mer in Summerville, McElveen Chevrolet in Mount Pleasant and McElveen Hyundai in Charleston. Franchised and independent dealers are turning to buy-here, pay-here to offer customers more options, says Mike Sheridan, president of Global Debt Exchange Automotive. The company is an online marketplace that allows dealers and finance companies to buy and sell auto loan portfolios. “It’s just like when franchises started to get into used cars,” Sheridan says. “The burden is falling to dealerships when traditional lenders tighten the lending criteria.” ance, high-interest notes with biweekly payments — has gone by the wayside. Changes in technology made a significant impact. “Along the same lines, the years of the $3,000 automobile are gone. Used cars are more expensive than they used to be.” Also, Sheridan says, buy-here, payhere dealers act in better faith because they realize illegal loans will raise the eyebrows of attorneys general and put the dealers out of business. The industry also has come back into favor with financial institutions that lost money in the 1990s because of high-growth-rate requirements, Shilson adds. “In 1999, the quickest way to end a conversation with a banker was to say ‘buy-here pay-here,’ ” he says. “There was a tremendous credibility gap.” “There’s more training because dealers realize the mistakes are better made by their competitors than themselves,” he says. “If you make a lot of mistakes, it will cost you millions of dollars.” J.D. Byrider, which has 130 franchise and company-owned buyhere, pay-here stores across the United States, last year released an advertising standards manual that provides legal guidelines, spokesman Jim England says. J.D. Byrider has had some legal problems. It was sued by the Kentucky attorney general and by the Ohio attorney general when those states received numerous consumer complaints, including grievances about pricing and condition of vehicles. Both suits were settled with terms that included the company reimbursing customers. “We’re focused on making sure our franchisees and company-owned stores adhere to strict standards on how to be effective operators,” England says. “We’re in a business that is extremely competitive and need to make sure is built on consumer trust because of so many operators who may have not dealt fairly in the past.” J.D. Byrider, which plans to open 15 locations this year including its first in California, also launched a Web site, www.jdbfacts.com, that pro- vides daily customer feedback based on calls to 400 customers. As of Feb. 4, its 313,310 surveys resulted in an average customer satisfaction sales rating of 95 percent and service rating of 88 percent. Still risky But even with the return of investors, more standards and a growing customer base, the industry still faces challenges. Today’s vehicles are more expensive, and down payments have dropped. That means dealers who previously risked only $300 to $500 when the car drove off the lot now have $5,000 on the street, Shilson says. Benchmarks compiled by the National Alliance of Buy Here Pay Here Dealers show the average default rate was 26 percent in 2007 compared with 26.2 percent in 2006. While unpaid loans remained steady at 17 percent from 2000 to 2002, they rose to 20 percent in 2007. “It takes a tremendous amount of capital and an infrastructure with good systems to control it and make sure you don’t get into financial trouble,” Shilson says. Some dealerships use starter-interruption devices to encourage their customers to pay. The devices allow the dealerships to disable the cars remotely if payments haven’t been received. But they don’t always work. Credit Country Motors installs the devices in its cars, but in one week it lost three vehicles when customers disabled the devices, Borkowski says. The loss cost about $22,000, he says. Buy-here, pay-here dealers also could face credit tightening, which would affect their sales, says Jon Ehlinger, a spokesman for DriveTime, of Phoenix. DriveTime finances its sales by pooling its loans and having bonds issued that are backed by those loans, he says. The loans are purchased by banks and companies such as Integrity Capital Management. “If you don’t have credit available, you’re unable to sell a car,” Ehlinger says. “As we go into 2008, how much will lenders pull back?”c Higher standards Industry professionals say the old buy-here, pay-here model associated with predatory lending has gone by the wayside. The industry previously lacked consistent accounting, reporting and analytical tools, says Kenneth Shilson, founder and president of the National Alliance of Buy Here, Pay Here Dealers. Lawsuits against dealers accused of selling overpriced, faulty cars also didn’t help the industry. Gerry Parker is COO of Integrity Capital Management in Alamo, Calif., which purchases loans from buyhere, pay-here dealerships. He says: “The traditional BHPH I grew up with 20 years ago — short-term, low-bal- Better training Today, established auditing standards and educational options for dealers have helped turn the industry around. The National Alliance of Buy Here, Pay Here Dealers and other companies offer educational conferences covering underwriting and collection tips. The alliance’s annual conference typically draws about 2,000 people who come to learn about the latest regulatory and legal changes, Shilson says. Wachovia acquires GE warranty business Donna Harris dharris@crain.com Partners Wachovia Dealer Services has acquired GE Money Warranty Services. Facts about the two companies Wachovia Dealer Services Serves 11,000 dealerships Has $25 billion auto loan portfolio Writes 50,000 auto loans and leases a month Used-vehicle contracts are 70% of business GE Money Warranty Services Serves 3,000 dealerships Offers vehicle service contracts, tire and wheel coverage New products could include guaranteed automotive protection insurance, used-vehicle certification Wachovia Dealer Services has acquired GE Money Warranty Services, citing the profit potential of the vehicle warranty administrator and insurer. Terms were not disclosed. Wachovia Dealer Services, a division of Wachovia Bank, has offered its dealer customers a vehicle service contract through GE. Adding insurance to its services allows Wachovia to compete more closely with automakers’ captive finance companies, Wachovia executives say. Tom Wolfe, president of Wachovia Dealer Services, noted that captives offer insurance products to dealers. “Supporting our dealers on the in- Zayas of GE Money Warranty Services: Acquisition by Wachovia means at least 8,000 more potential dealer customers. surance side of the business seemed an appropriate way for us to expand,” Wolfe told Automotive News. The GE warranty operation has more than 100 employees, most of whom work in Colorado. All employees, including top executives, are staying with the company. Wachovia Dealer Services works with 11,000 new- and used-vehicle dealerships. GE’s warranty operation serves 3,000 dealerships. “Even if there is overlap, we can sell our products to at least 8,000 more dealers,” says Orlando Zayas, president of the GE warranty business. The company sells more than 200,000 service contracts and wheel and tire contracts each year. Wachovia plans to expand the warranty company’s product line. Possibilities include guaranteed automotive protection insurance and a used-vehicle certification program, Wolfe said. Wachovia has a $25 billion auto loan portfolio and writes 50,000 auto loans and leases a month, Wolfe said. Used-vehicle contracts account for about 70 percent of Wachovia’s business. The expanded company will use both the Wachovia and GE brand names for its insurance operations for about a year, Wolfe said. Wachovia has not selected a new name for the combined company, http://www.jdbfacts.com
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