Buy-Here-Pay-Here Subprime Auto Dealers: Underwriting & Servicing Loans

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As a starting point, could you provide some background about yourself, your area of expertise, and your career in the subprime lending space?

People quickly realized that adding a buy here, pay here option to a dealership meant having an option for all the customers who would otherwise be turned away. The question was, where were these people going after leaving the dealership? They were going down the road to a buy here, pay here. So the thought was, why not do both? This concept became popular in the US in the mid to late 90s. Buy here, pay here became something more people did. It was easier back then because the country and the world were less litigious, the rules were haphazard, and cars were cheaper.

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You mentioned that through consultancy, you realized independent dealers were more sophisticated than they seemed. What do you mean by that?

You buy a car from the auction, and it goes into your service department. In a new car store, the service department tries to make money, charging $165 an hour for labor and marking up parts by 40%. Meanwhile, the independent dealer charges $85 an hour with no markup on parts, just to break even. So, you have two cars on the lot selling for the same price. The independent store makes an extra $1,000 in profit because the new car dealer made money off himself. The independent dealer creates efficiencies because the dealership owner often buys the cars and manages everything.

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What makes them better at collecting?

Several factors contribute to their success. They have superior data and algorithms to determine which loans to approve. Their collection practices are generally more effective. They are quick to repossess and liquidate assets to generate cash for new loans. In the buy here, pay here market, we're servicing loans that Westlake couldn't collect. Why can a buy here, pay here dealer collect from the same customer more effectively than Westlake Centralized collections. When you buy a car from Westlake, you deal with a dealer who has no relationship with Westlake once the sale is complete. When you're a buy here, pay here dealer, the customer comes into your store, and you develop a relationship with them. You interview them, show them the cars they can have, and structure the deal with them. After they drive off and have an issue, who do they call? They call you. Whether it's a mechanical issue, a wreck, or a payment issue, they're calling you. If they don't make their payment, you're the one calling them. buy here, pay here works well because it's relationship lending. You know who you can work with and who you can't. For example, you know Mike works at the factory and gets off Friday at 2:00 in the morning. And even though his payment is due Friday, he's never going to pay until Monday. You know that he's always three days late. At Westlake, they don't bother to know that. So Mike would immediately start getting emails or nasty phone messages about how they're going to repossess him. But at a buy here pay dealership, they would say, oh, it's Mike, he always pays on Monday. We don't need to bother him. If he doesn't pay on Monday, we will worry. Now, spread that same type of relationship over 5,000 loans. My collectors know all 5,000 customers. The Westlake person is just calling someone from a queue. That's why we collect better; we make decisions based on individual circumstances. Major lenders make decisions based on pay plans, delinquency, and charge-offs. They're managing the program, not working with customers to keep them in it. buy here, pay here dealers manage the relationship, which is why we're better at it.

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