The automotive lending industry has been skittish over the past few years, particularly when it comes to subprime lending. The market has been hot, growing at double-digit figures annually, but as large lenders attempted to avoid significant risk in uncertain political and economic times, in Q2 2017 subprime lending saw a 7.8% decrease year-on-year, according to TransUnion.
However, the burgeoning success of has now seen the pendulum swing back in late 2018, with more lenders viewing the subprime market favorably. In 2018’s third quarter, subprime auto loans were up by 7.3%. This is a significant reversal, especially considering the previous year’s pessimism and protectionism.
Traditional dealerships have largely expected customers to source their own financing or passed on the duty of arranging financing to a third party. This makes for a clunky arrangement for consumers who become annoyed at the difficulty in negotiating for a vehicle they’re not sure they’ll get financing for in the first place.
, essentially in-house financing, allows the car dealership to offer significantly more flexibility when it comes to loan terms and underwriting. The dealership can write its own pricing and interest structures, cut out all commissions paid to outside third parties, and consider lending outside of the strict guidelines of the rather antiquated credit scoring system.
From a customer’s point of view, everything is available in one place, making for a significantly smoother experience.
As credit scores are not as important to the Buy Here Pay Here dealership as the proven ability to repay the loan, those with poor credit or issues with credit in the past usually find themselves able to get financing for a vehicle much more easily than through traditional methods.
Buy Here Pay Here dealerships that take full advantage of this more personal touch find that profits increase through customer loyalty. The National Automobile Dealers Association’s Financial Profile research tells us that the service department now makes up 49% of an average dealership’s gross profit, and this percentage continues to increase.
It’s therefore a great boon to offer financing in-house as it increases overall customer retention and loyalty, seeing them come back to the dealership for servicing and resulting in more profits for the dealership.
As the Buy Here Pay Here dealership market matures, the dealerships are becoming smarter and more efficient, improving as lenders and impressing consumers.
The overall consumer-level delinquency rate is falling (down from 6.9% in Q3 2017 to 6.8% in Q3 2018, according to TransUnion), and this can be partially attributed to Buy Here Pay Here dealerships’ focus on smarter risk tolerance. Buy Here Pay Here dealerships actively help those struggling with repayments by offering much more lenient terms and taking into account personal circumstances. They also factor in more than a simple credit rating score when deciding how much to loan in the first place, making for a more intelligent lending system.
Just as the automotive industry is being revolutionized by the Buy Here Pay Here dealership, another reason for lower delinquency is improved consumer financial savvy. With access to much more information than they did 10 years ago, consumers are taking a more sensible approach to what they can and can’t afford in a new or used vehicle, something that traditional dealerships using a credit rating system struggle to keep up with.
Equifax and the National Independent Automobile Dealers Association’s Q3 Auto Business Outlook suggests that people are moving away from new vehicle sales and leasing to buying used vehicles.
The price of new automobiles is rising sharply, so picking up a great deal on a slightly used vehicle is enticing buyers to used car dealerships. Lease incentives are also unexciting, so new model leases have dropped by 2.9% compared to the previous year.
The survey also showed Buy Here Pay Here dealerships bullish on the 2019 market, with 47% expecting economic conditions to improve, 32% expecting to expand their business in the next quarter, and 56% expecting sales to increase over the next quarter. All of these figures are up from the previous year’s survey results, indicating Buy Here Pay Here dealerships are growing and that they expect further growth through 2019 and beyond.