The BHPH Industry originated primarily in the early 1980s during the savings and loan crisis. With many similarities to the current financial crisis (2008 – present) credit was difficult to obtain, unemployment was rising & the economy was still in a transformation from a production-based economy to a service-based economy.
Automobile dealers who still wanted to sell cars had to find a way to deal with the increasing price of vehicles relative to income. They had to sell these vehicles to wary consumers who were unwilling or unable to pay 'cash' for the new purchase. In many cases, when banks would not loan to the consumer, the Automobile dealer would start a related finance company (RFC) and have that finance company approve the loan on the vehicle. This was a bold step into the banking business for automobile dealers. The advantage to the dealership of having an RFC finance the sale was decreased risk on the sale and finance of the vehicles sold. Since both companies had the same ownership, dealers could now essentially benefit from the profit on both the sale and the loan for a single vehicle. Additionally, the down payment required on a BHPH loan generally larger than the total profit on the sale of the vehicle. Therefore, if the buyer didn’t make payments, the RFC could repossess the vehicle and sell it again at the dealership. Many of the benefits of separating the RFC out from the BHPH dealership are based in the tax code changes of the Tax Reform Act of 1986. In that act it restricted any companies that utilize inventory in their operating business from using cash accounting.[1][2]
One difficulty that the dealerships have is cash flow. Often, used car dealerships purchase inventory with a floor line of credit. The most common flooring line is either a standard line of credit from a bank that is secured with other collateral such as real estate, or it is a line of credit (MAFS) from the nation’s largest automobile auction house Manheim owned by Cox Enterprises. Typically flooring lines require the automobile to be paid off in full within 90 days of purchase. This means that automobile dealers are operating on the banks money and are trying to turn units as quickly as possible so they don’t have to pay off the loan on their inventory before they sell it. One difficulty that this presents to BHPH dealers is that when they sell a vehicle to a BHPH customer the RFC needs to produce the loan funds so the dealership will have the funds to pay off the line of credit on that automobile. Often this ‘cash crunch’ is the primary reason for dealerships to go out of business.
As the Savings & Loans crisis started to abate in the mid-1980s the Buy Here Pay Here industry started to move its focus towards consumers with lower credit ratings, and today BHPH has become known as ‘bad credit’ approval. As automobile dealers began to see a significant portion of their business coming from the BHPH industry the need for lending systems and software increased. Most automobile dealers were great at selling, servicing, and repairing vehicles but did not know how to run a finance company.
Buy here pay here history information referenced from Wikipedia.com
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Copyright (c) 2011 Ed Sneineh
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