Buy here, pay here

Buy Here Pay Here (BHPH) refers to a method of running an automobile dealership in which dealers themselves extend credit to purchasers of automobiles. Typically, purchasers of cars at BHPH dealerships have poor credit history, and loans have high interest rates. BHPH can provide options for those unable to meet credit standards elsewhere.

History and Background

The BHPH Industry originated primarily in the early 1970s during the USA 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. Historically, the down payment required on a BHPH loan was 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. Since 2008, many outside lending institutions have entered the market and the average down payment on a BHPH loan has significantly decreased, as dealers try to maintain a share of the market. 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.

Issues

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. 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 bank's money and are trying to turn units as quickly as possible so they don’t have to pay off the loan on unsold inventory. 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 a ‘cash crunch’ is a primary reason for dealerships to go out of business.

Regulations in the USA

Related finance companies are not regulated as strictly as banks by the Federal Reserve, rather they are regulated by the Department of Financial Institutions or Department of Commerce on a State level depending on the State. Regulations may include maximum interest rate, late fee amounts, grace periods and so forth. Some of the companies that have started as RFCs have grown large enough that they became Industrial Banks which are FDIC Insured banks owned by non-financial institutions.

On September 29, 2012 California Governor Jerry Brown signed laws regulating Buy Here Pay Here dealerships. The dealers will now be required to display the true fair market value on each buy here pay here vehicle and also provide better options in making payments outside the dealership. The dealer must also provide a 1000-mile 30-day warranty.