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Tuesday, February 07, 2006 

Vol. 2 No. 7

A Car for Every Pocketbook: “Buy Here/Pay Here” Goes Mainstream

There was a time in the not-too-distant past when those who were ‘credit impaired,’ that is, those who had credit scores too low to allow for new or even used vehicle conventional bank or finance company financing, didn’t have too many desirable options. Every town had a few small dealer/owner financing used car lots, called, “Buy Here/Pay Here” (BHPH) to those in the trade, where someone bought a used car with a down payment and made their regular payments, usually twice a month directly to the used car lot. However, for many years these lots were usually in places where you really didn’t want to go, staffed by people you really didn’t want to know, selling vehicles you didn’t want to drive, or, indeed, at a place you really didn’t want to have to return to every other week to make what was usually an over priced payment.

The world, or at least the U.S. portion, has dramatically changed on this front. I remember reading just the other day in a trade paper (and if I hadn’t lost the clipping I’d give an exact quote with the exact figure instead of paraphrasing), that something just shy of half of all of the car buying public out there, new and used, have some credit problems, that is, they qualify under the label of “credit impaired” and only qualify for either sub-prime or Buy Here/Pay Here (BHPH) vehicle financing, which prompted the topic for this entry. So, you could say, what was once the exception is now the rule, and what was once the minority is now mainstream. The headline below just came over on a Feb. 3 trade e-mail newsletter produced by The World of Special Finance Magazine (the fact that there is even a print publication dedicated to the topic tells you something, doesn’t it?):

“Automotive Sales to Individuals with Discharged Bankruptcies to Reach Record High”

The silver lining for the ever-increasing number of less-than-perfect credit buyers is that now there is a legitimate mainstream retailing market to meet the needs of the credit challenged. Today the places people with bad or no credit can go to buy used cars look very much like any other retail car outlets, in facility, personnel etc. In fact, large national multi-location used car dealers, specifically focused on the credit impaired, represent some of the best, most well run, customer-friendly retailers in the car business. Dealer chains such as DriveTime have sprung up and are growing by leaps and bounds; at last count DriveTime had something like 85 retail outlets around the nation, and are looking to be at 100 within a short time. Most telling, in a trade newspaper recently (Used Car News, December 5, 2005), I read that DriveTime specifically looks to avoid setting up locations anywhere near “the typical buy-here, pay-here part of town, co-located with pawn shops and check cashing centers” but look to be in the mainstream, near McDonalds and Walmart. So not only are these establishments now in the mainstream of car retailers, they may actually surpass the norm in service and customer care, when you consider the professionalism of the folks at DriveTime, Carmart, JD Byrider, and other large car dealers who focus on serving the credit challenged, and the fact that they operate under corporate directives that each of their retail outlets hold to a strict standard of operations, service criteria and consumer satisfaction metrics. More to the point, they all seem to be growing by leaps and bounds, which means, I’m afraid, that general consumer credit quality is growing lower every year. Now, add to that general trend the fact that due to pressure from federal regulators, credit card grantors have just doubled minimum monthly payments on credit card balances from two percent to four percent, and that Bank of America has anticipated the affect of this and has set aside an extra $130 million to cover projected losses from defaulting cardholders (more facts from the latest edition of World of Special Finance), and you can anticipate no general reversal of this expanding sector any time soon.

Incidentally, even the prime credit car buyer, in general, opts for longer and longer finance terms now as compared to even a few years ago. I don’t think of myself as that “long in the tooth” but when I started in the retail end of the business, 24 to 36 month credit finance terms were the norm, and I’m not sure any automotive finance place I dealt with went beyond 48 months……by the time I left the dealer business, 60 months was not uncommon…now I hear, to compete, 72-month new vehicle financing is available…tell me what conclusions that leads one to…it isn’t just the sub-prime folks who are having to stretch these days.

So while maybe the slogan of Credit Acceptance Corporation, a company in the business of helping car dealers finance previously “unfinanceable” vehicle buyers, “we change lives” might seem a little over reaching, certainly the proliferation and general upgrading of those car dealers around the nation, large and small, satisfying the transportation needs of everyone regardless of credit rating, is a good and welcome development.

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