Now that tax refund season is a memory, we must keep in mind that the summertime blues may follow if we are not prepared. What are the summertime blues, you ask? Simply put, it is at this time every year (June, July and August) where sales volume retreats to normal levels. Customers start missing payments, (June), delinquency rises, (July) repossessions and charge-offs begin (August). This is an annual occurrence and yet every year it becomes more maddening.
Before this phenomenon makes us crazy, we must first examine its causes. The first cause of summertime blues is first quarter sales volume. The additional number of loans originated in January, February and March are at the root of this problem. The bulk of buy here-pay here loans go bad (if they are going to go bad) in the third to the ninth month after origination.
Logic dictates that loans originated in the first quarter will see the greatest number of repossessions and charge-offs from June (3-6 months old) to September (5-9 months old). If we have a great first quarter in terms of sales volume, it is only natural that we will feel the pain in the summer months.
The second cause of summertime blues is that our customers start failing to make their payments consistently and fall behind creating delinquency at this time of year. Right now, we also have to add in the fact that our customers are paying more for fuel than ever.
There are a couple of causes of this phenomenon. The first cause is that our customers go on vacations (June, July) whether they can afford to or not and they spend money for back-to-school (August, September) items including clothing, books, backpacks etc. This can make us crazy, angry, frustrated and tired but trust me when I say, “We can’t change our customers habits.”
The second cause of poor cash collections in the summer is that this the natural time in the life of the loans (3 to 6 months) where customers who have been jammed into high payments start failing. These customers pay us in the beginning of the loan (while they still like their car) while, at the same time, fall behind on their other debts and obligations. At some point they must stop paying us in order to pay other seriously overdue accounts such as rent, power and water.
The combination of fewer ups, fewer sales, less payments and more repossessed cars on our lots is enough to give any dealer the blues. Although this occurs almost every summer it does not make us feel any better. The summertime blues cure I offer is two-fold. First and foremost, is that some of this fallout is naturally occurring and should not be met with grief and frustration. What we can do is focus our energies on our selling, underwriting and closings next spring so that we create better loans from the get-go. We must vow not to “fall in love with down payments but fall in love with our customer’s stability and ability to pay.”
We must contract customers with affordable payments dictated by us and not by the customer. We should also remember to take our time during credit investigations to ensure we feel comfortable with the customer, the loan and the terms. We should also ensure that the customer leaves our dealership with a complete understanding of our finance program. Our goal as dealers is to help customers succeed, not help them fail. This goal can be achieved through a good strong loan closing.
The next step in overcoming the summertime blues involves the customers already on the books. We should ask ourselves if we are doing everything we can to ensure our customer’s successful loan repayment. Are we working with them in their times of need? Are we managing their past due payments and allowing payment arrangements when they fall behind? We cannot forget that these customers will not be cured of bad repayment habits; all we can do is work with them when they fall behind.
It takes so little effort to work with customers and so much effort to replace them. For those of us who do not believe in working with our existing customers and do believe in replacing them, we must ask ourselves why the customers we replace the old customers with, fare no better (lower delinquency and charge-off rates) with loan repayment success.
The reality of buy here-pay here is that 6 to 8 out of every 10 customers will pay us and 2 to 4 won’t (we just don’t know which ones will and which ones won’t). The best dealers strive to get more out each customer on every deal and create more successful loans more often which in turns creates future sales volume and that will alleviate the summertime blues.
Chuck Bonanno is an Executive Vice President of the firm, Leedom and Associates, LLC. He is an executive Conference Moderator of Buy Here-Pay Here and Automotive Finance Twenty Groups. He is a nationally recognized speaker, author, industry trainer and consultant. Click here to see when a Buy Here – Pay Here seminar is coming near your town!
Leedom and Associates, LLC – Sarasota, FL