We believe that growth rate of the unbankable customer segment of the automobile market will accelerate during the next 12 months.
How do you handle the “unbankable customer” in your dealership? Are you recognizing your share of this potentially profitable market? What opportunity does this segment of the business present? How is the market changing? Where is the market headed over the next 12 to 18 months? Let's look at industry trends within the nonprime/subprime/buy here-pay here segment of the automobile market.
First of all let's define the market of which we speak. We have adopted the term “unbankable customer” for any consumer that visits your dealership and does not qualify for a conventional lending program. For some of you, this may be 30% or more of your dealership traffic. The real question is how do you serve this segment of the market?
Many of you may remember the wonder years of 1996 to 1998. There were subprime lenders a plenty. Special finance departments were getting customers approved through subprime lenders that were previously turned down with no conditions or chance for approval. Buy here-pay here dealers were feeling down and out because much of the business was being placed with national lenders. Dealers were recognizing significant increases in profits by serving the subprime segment of the market. Then everything changed.
The state of this segment of the market today is quite different. During the past 12 months we have witnessed what many believe is the final shake-out of the subprime lenders. There has been a great deal of consolidation and we can count at least 20 bankruptcies or closures among the lenders serving this segment of the market from 1995 to 1998. The good news is that those left standing appear to have weathered the storm and have solid business models and understand their niche.
As a result, the buy here-pay here market is a booming! We have noticed a dramatic increase in the number of dealers entering the buy here-pay here business. It is almost like the '80s all over again. Many dealers have enjoyed a successful run and have capital to invest into new opportunities. Each month we help new dealers evaluate the buy here-pay here business and determine if there is an opportunity for their dealership. What is driving this market?
As more and more subprime lenders tighten their credit underwriting policies potential buyers are left with no other alternative but to return to the buy here-pay here operation. We have four 20 groups that are devoted to buy here-pay here and the retail sales of these dealers as a group are up over 18% from last year. We expect this growth curve to continue.
What is appealing about the buy here-pay here business is that when run properly the return on investment is at least 60% per year. That is to say if you invest $500,000 in a buy here-pay here start up you should expect a return of $300,000 of net profit pre-tax after losses each year. Not a bad opportunity. The trick is having the discipline to operate in that segment of the market.
We believe that growth rate of the unbankable customer segment of the automobile market will accelerate during the next 12 months. Much of this is driven by two key factors. First, we are in a period where major corporations are laying off workers by the thousands. This creates more unbankable consumers. Secondly, bankruptcy rates are at an all time high. After a bankruptcy filing consumers are typically left with special finance or buy here-pay here alternatives when it comes to auto financing. So if you are considering increasing your efforts to profit from this segment of the market your timing couldn't be better.
To learn more about the special finance or buy here-pay here segment of the market you may want to attend the National Special Finance and Buy Here-Pay Here Conference in New Orleans on Oct. 14-16, 2001. This conference is sponsored by Ward's Dealer Business and is the largest trade show for this segment of the business. We hope to see you there.
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Chris Leedom the President and CEO of Leedom and Associates, LLC., a Twenty Group training, and consulting firm. He is a recognized industry expert, trainer and consultant. He is the Chairman and Founder of the National Special Finance and Buy Here-Pay Here Conference. You may reach him via email at firstname.lastname@example.org or at 800.966.8733. Leedom and Associates, LLC. is headquartered in Sarasota, Florida.