If you are a BHPH Dealer, you have to have a Collections Plan.
To start that plan, you need to decide where the boundaries are.
It is also vital that you understand your own underwriting processes. I’ve said before, Poor Underwriting leads to Poor Loan Performance.
1. Do you run a Consumer Credit Report on each customer applying for credit?
2. Do you know how to read and understand the report? If the answer to either of those is “No,” then we have identified the first major issue.
If you read this blog regularly, you may have seen my entry about “Everybody Rides.” The “No Credit Check” signs are a large problem. You simply cannot make an informed credit decision about a consumer from his last two pay stubs.
Look, you have two choices as a BHPH dealer. Do you want your business model to collect the payments, and make a profit, or do you want to be in the repossess and re-sell business? Underwriting is the key to the first option. Lack of it inevitably leads to the second. By the way, those who make the second choice usually aren’t around very long.
Next question is, do you know how to ascertain a consumer’s availability to make a payment? Simply put, how do you find out how much money is going to be available for a payment, and how often? This is a huge key to payment collections. It is hard to collect what they do not have.
Be realistic here, and leave them some room. If your payment puts them at the absolute edge of their solvency, then any small unexpected emergency for them means you don’t get paid.
Lastly, have you sold them a car they *want* to pay for? Now, this question is not a trick. Go read (or re-read) my topic on Right Sizing The Customer. Click Here. Also read the Happy Customer entry, found here.
Once you sell the car on a contract, the next bit is collecting the contract. On paper, that sounds simple, but in the BHPH industry, that is when the road gets bumpy.
First, since your customer is sub-prime, then you have (hopefully!) already understood that this person has a problem with credit obligations. I am not saying it is unreasonable to expect on-time payments, but I will say it will not be the norm.
Most BHPH customers are actually not Sub-Prime, since this designation is typically for borrowers with FICO scores from 580-670. This is the designation for Fair Credit risk. Most of these customers can get loans from institutions, albeit at a higher rate.
Those with scores below 580 are considered Deep Sub-Prime, and the credit risk is considered Poor. Quote from Investopedia.com: “Experian reports that 27% of Fair Credit category borrowers and 62% of Poor Credit category borrowers are likely to become seriously delinquent.” (Emphasis added.)
Put bluntly, that means three out of every five of your Deep Sub-Prime customers WILL be very late with one or more payments.
Learn More about Credit Scoring at: https://www.experian.com/blogs/ask-experian/infographic-what-are-the-different-scoring-ranges/
Some of these people work well with an early reminder or two. If your DMS has an email system that can reference the due date, schedule a Friendly Reminder for about a week in advance.
So you have to set policies for “how late is too late?” and stick to them.
Picture a square area. The people inside this area are within the boundary of your payment tolerance. Make two or more larger lines outside that.
The first area between the sheltered harbor of your patience and the next line out is the “Ok, you are late, and let’s deal with it” area. Blow the whistle, ring the bell, and try to get them to wander back into the inner area.
Across that line, straying further, is the “make or break” area. Have enough rope to wrangle those strays back into one of the first two areas. The boundary to this area, once crossed, is hard to get back across.
That third area should be the last one they reach before hitting the wall that encloses your business model. The people in this area will almost never be good payers again. They reach this area for a reason. Whether it is their own decision, or the cruel hand of fate has pushed them into it (almost) doesn’t matter. They will hit that outer wall. That “wall” is the act of repossession.
So, what defines the areas? For most established first-tier finance operations, the Due Date of the payment is the first line. 10 days past due is usually the second line, and 30 days is the wall. For these companies, that Danger Zone is very thin.
For sub-prime customers, you may set your safe area line at 10 days past due. Second line is 20 days, and the Danger Zone is 21-30+. Your Danger Zone may be a bit wider than first-tier, and needs an observation post.
Is the customer simply meandering in the bad areas, or are they drifting slowly outward, or, are they at a full run prison-break style?
What is the whistle? Simple (but pleasant) reminder texts and emails.
Phone calls and more strongly worded emails are the rope you use to try to get them back into the fold. Remember that you own a business, and should be professional. Screaming, insults, threats, and foul language should never be used.
The faster or more determined they are about moving outward is the faster you use the tools at hand.
What about the repo wall? Here is they way I see it: It is a final wall. It should be. Repossession should not be an everyday collections tool. It should be a final admission that this loan did not work out. Remember that if you repossessed legally, then you are (typically) not required to reinstate the account. The customer has the right to accelerate the loan, and pay it off to retain the car.
Some dealers use a first temporary repossession as their rope to try to draw the customer back in, and to remind the customer of the consequences of going afoul of the payment agreement. I will hesitantly agree with this with a few conditions:
- First, use your words. Make them understand your position and expectations.
- Second, they get ONE temporary repo. The next one is final.
- Third, there should be no profiteering (repo “fees”) getting tacked on. Remember that the laws usually allow you to recover your EXPENSES of repossession. I’ve yet to see a state or court that gladly allowed the BHPH dealer to profit from the act of repossession.
The final repossession should be a last resort.
Other tools are available. The first one is your own humanity.
Sit down with the customer, and, with an open mind, ask what the deal is. Remember that things change. Maybe the overtime the plant promised would last for a year suddenly dried up, and they are struggling under the lower income. Maybe they suffered another loss that occupied them and their disposable income for a bit. Be willing to work with people.
Maybe they don’t want to pay for a car they can’t drive because it is broken down. Work out a repair and payment plan for that.
Nothing requires you to keep extending your olive branch if they keep slapping it away, though. I asked you to be a human being, not a doormat.
NOTE: If you are a consumer reading this blog, please go to https://www.bankrate.com/finance/credit-cards/protect-credit-score-economic-uncertainty-coronavirus/ to make sure you are prepared.