Lease Here Pay Here / Buy Here Pay Here – It’s a Game Changer in the Pay Here Market

white chess piece on top of chess board

The idea of both financing options, LHPH and BHPH, is to get a customer who would normally not qualify for conventional financing into a suitable vehicle.  Thus, the dealer avoids paying heavy fees and recourse to a finance company.  In both cases, it is the dealer that will be responsible for the sales, service, collections, and ultimately the success of its customers, though the bigger picture involves evaluating the potential for the profitability and success of these two options.

BHPH has been in the mainstream for over 40 years and has become an excellent revenue and profit source for independent and new car dealers alike. LHPH has been in the marketplace for the last 10 years or so, and with the change in tax laws in the Pay-As-You-Go states, it has become a game changer for this market.

Knowing the advantages and disadvantages that come with the LHPH and BHPH models is essential to understanding how either one might complement your business model.

Lease Here Pay Here is a true game changer in our growing industry and if done well can be extremely profitable. Like anything else that we view as a new idea, we research and ask questions and refer to resources. Utilize them and gather insight to determine if LHPH is right for you.

Following are advantages and disadvantages for both options and items to consider when implementing a LHPH or BHPH program.

Similarities between LHPH and BHPH:

  • Customer is financed in-house.
  • A subprime customer who normally is not able to obtain traditional financing is served.
  • The dealer’s underwriting system is utilized to decide whether to provide financing.
  • Collections are handled at the dealership or by a closely watched collection department or call center.
  • You control all aspects of the sale, collection, service, and profitability!

LHPH Competitive Advantages:

  • 31 states have Pay-As-You-Go benefits. This is a significant sales tax benefit, making the dealer cash flow positive at the inception of a deal in these states.
  • Cash flow is increased through tax deferral of sales tax payments.
  • You can sell a lower mileage, newer car to your customer, usually for the same price as a BHPH.
  • Customers can lease for a shorter term for the same payment.
  • A lease cannot be included in bankruptcy – equates to fewer losses because of bankruptcies. *
  • No redemption for a chapter 7
  • No reduction on a chapter 13
  • You own the car; thus, a repossession company has less hesitation securing vehicles. *
  • Consistent inventory – Dealer can keep hold of the vehicle once the lease matures.
  • No need to have a separate RFC.
  • Ability to depreciate your assets over time in your LHPH portfolio and report the losses on your federal income tax return in the form of a net operating loss (NOL).
  • The Graves Amendment – leasing companies shall not be held vicariously liable for the negligence of a driver using the leased vehicle.
  • For those who understand leasing, this familiarity is itself an advantage because you already understand how the concept works.

LHPH Advantages in Texas:

  • The dealer will pay the sales tax on only the ACV of the vehicle. This is only paid once
  • If the first lessee defaults after 12 months and the dealer re-lessees it, no tax is paid
  • When the dealer is done with the vehicle and decides to wholesale it, they will get a Sales Tax Credit for the amount they sell the vehicle for
  • Tax credits can be applied to future deals (within 18 months) to reduce or eliminate sales tax on future vehicle purchases
  • The sales tax can be added back into the lease
  • Lessees and LHPH Dealers pay less tax overall

LHPH Disadvantages:

  • Concept of the unknown: For those who do not understand leasing, it can be difficult to see the potential.
  • Lending choices are not as abundant.
  • Difficulty finding the right Dealer Management System that offers a compliant leasing module and collection technology together – There are but a handful that understand the LHPH model.
  • Leasing accounting is different than BHPH, so finding the right CPA or accounting firm is important.

BHPH Advantages:

  • This model has been around for 40+ years and is familiar to most dealers and customers.
  • Related Finance Company
    • It can separate some financial risks for the dealership.
    • Separates the “finance co” from the car dealership, typically with a different name.
    • Allows the finance company to buy the loan at a discounted rate, which creates some tax benefits.
  • Lending is more readily available from banks, finance companies, and investors.
  • There are more dealer management systems capable of doing BHPH support and service.

BHPH Disadvantages:

  • The market has become highly competitive, decreasing potential profits.
  • State sales tax is paid upfront for the price of the vehicle.
  • Down payments are lower because customers have more choices.
  • Terms are longer because the entire balance is financed.
  • Bankruptcy and repossession laws in most states limit your ability to negotiate a fair payment or balance or sometimes procure your asset in a timely manner.
  • Customer is savvier and can shop online to compare BHPH outfits against each other.

*Always check with your legal advisor or counsel before deciding to do any business.

-Bill Elizondo, October 16th, 2019

Sell Less Cars & Make More Money

Not too long ago, collections had a core philosophy in one fundamental element; “You have an obligation with this debt.” A car, a credit card, even a house were obligations to a commitment made in order to receive goods or services. When a collection issue came up, that basic truth dictated how the collection process would proceed. The basic premise was, “You owe this debt. You agreed to pay it, so do the right thing…pay it!”

As the demographics in the consumer base evolve, the approach to advertising, sales and even collection practices must evolve in order to be effective within that demographic. At one time, credit was something held very dear to most people. It was not to be used unless it was an absolute emergency or to purchase a home. Many will remember when a credit card was manually imprinted on a double receipt. Before computers, and all of the automation and background checking, it was used based on another basic principal, “Trust”.

Relationships coupled with trust are the key to minimizing loss while increasing cash flow. Let’s say you loan a friend $100. Your friend agrees to pay you when he gets paid this Friday. Your friend comes to you and says, “I’m sorry, I only have $75. I had to pay for some medications after I caught the flu.” Would you say, “No! If you don’t have the entire $100 I can’t accept it.” Of course not. You would take the $75 and work out something for the other $25. You thought enough of your friend to loan them the money. What if this friend had a history of borrowing and not paying back loans with your circle of friends? Then the question would be, “Why would you loan the money with the expectation of a different result?” Historically, they had shown not to pay. So whose fault would it be when they default?

The relationship starts during the sales process. Treating customers in an honest and fair way by explaining all of the details of the deal and making sure they are able to fulfill those obligations are the beginning of a good relationship built on trust. Failing to put your customers in the best position to succeed is not only wrong, it’s bad business. The day your customer purchases the car is one of the happiest days they’ll experience during the term of the loan. This is the opportunity to explain their responsibility and that making a car payment is usually not easy. What do they do if they can’t pay all or any of their payment? It is a used car and it will require repairs at some point. Are those repairs covered by warranty? Are they responsible for the cost? Is the payment still due if it isn’t running? This is the first and only opportunity the dealership has to set the tone for the relationship. The more (potential) issues you can address during the beginning of this relationship, the more likely the relationship is to make it to the goal of any BHPH/LHPH deal, Payoff!

“Sell less cars, and make more money.” This principal is not only more profitable requiring less cash flow, it provides much better service to your customers and even your community. The way to do that is through building a relationship built on trust. Not only trusting that the customer will fulfill their obligation, but that the customer can trust we the dealer fulfill ours.

– Roger Newton, February 15th, 2019