Buy here pay here sales look set to increase in 2018, and while that may, overall, be good news for buy here pay here dealers, but it could also be an indication of rising debt and the accompanying risk of delinquency. There certainly appears to be more at work than the simple increase in profits. There are a lot of factors contributing to this growth, and some of them may not necessarily bode well. What can buy here pay here dealerships expect long term as a result of the current rise in customers? Could these changes forebode higher default rates in the future?
To anticipate where this trend may be heading, it is important to understand how it developed. According to the LA Times, one catalyst for the current growth is the fact that the face of the average buy here pay here customer is changing. According to a recent article, while there are still many “traditional” BHPH buyers around—low income customers who desperately need a used car to commute to work—there has been an increase in customers who have college degrees and make good money, but can’t seem to build their credit scores. For many of these customers, the issue is that they cannot seem to stop accumulating debt, and have trouble paying all that is owed.
This, of course, is the first indication of how the current trend could prove problematic. While it’s true that in most cases a buy here pay here dealer can repossess and resale a vehicle, that can be costly. It also carries a risk: some default vehicles are never found, and others are involved in wrecks or returned in such poor condition they have to be junked. There is a point to which these issues are counterbalanced by profits, but if the rate of defaults rises too much, it could spell trouble.
Things already seem to be moving in that direction – 6.3 million Americans are at least 90 days late on their car payments, and the buy here pay here sector sees a higher rate of these delinquencies than other dealerships. (Read our article here.) While there are more people turning to buy here pay here dealerships at the moment, it may also mean an overabundance of delinquencies in the future.
Additional reasons for the rise in buy here pay here customers are more straight forward: the overall growth in car sales, and the recently recovered economy. According to the Lexington Herald, many Americans who fell into monetary troubles during the Great Recession, as it is often called, have not fully re-established themselves financially. Mounting late fees, increasing debts, and stagnant wages all conspire to keep them down.
This indicates another possible problem. It’s no secret that consumers overwhelmed with debt often make matters worse as they try to find a way out or buy themselves some time. Why is that significant for buy here pay here dealers? Because it means that, in some cases, customers able to make their down payment and timely payments at first could continue to spiral deeper into debt making higher delinquency rates an ongoing problem.
Delinquency, of course, is a known risk factor for buy here pay here dealerships, but there will be a tipping point at which the rate will be high enough to cause a problem. With the continuing fallout from the Great Recession and the changing face of BHPH customers disrupting the security of buy here pay here dealerships, those who own them would do well to pay more-than-usual attention to the financial trends as they develop.
Sources: Lexington Herald