BHPH Economic Challenges | Advantage GPS

BHPH Economic Challenges

BHPH Challenges during Current Tax Season

This time of year is typically a sweet spot for automotive retailers as Tax Season is in full swing. Flush with IRS tax refunds, consumers arrive on dealer lots looking to get into a vehicle with large down payments.

Over the years, tax season has become “compressed,” “stretched out,” or “non-existent” depending on the dealer you speak with, and this year, in particular, has made these uncertainties even more of a challenge for Buy Here-Pay Here (BHPH) dealerships.

The current automotive retail economics have had a significant effect on BHPH dealerships. The recently released Cox Automotive Auto Market Report highlights many challenges and some bright spots for auto retailers nationwide.

Among those bright spots are dramatic decreases in COVID-19 hospitalizations, low unemployment numbers nationally, and record employment levels regionally in the South, Southwest, and Mountain states. In addition, consumer spending, Cox reports, was up 21 percent year over year with “strength in travel and services.” As a result, those consumers have a favorable sentiment regarding the economy, which bodes well for all retail sales.

Not all the news provided in the Cox Auto report is favorable. The shortage of new and used car inventory remains, and wholesale values, which had seen a decline in recent months, have flattened but at a very high level. Anecdotally, dealers sharing their insights on social media groups report stubbornly high prices at auctions. This significant increase in vehicle acquisition costs has made it difficult for BHPH dealerships. Their lower wage-earning customers must have bi-weekly or monthly affordable and sustainable payments over the longer finance terms dealers must offer to keep payments at that level.

Cox Auto reports that while IRS tax refunds are flowing to consumers faster (12% faster than in 2022), the average refund is down 11% to a hair over $3,000. Couple this smaller refund to higher prices for almost all goods and services as inflation remains at 25-year highs (over 6% year over year), and consumers have fewer dollars to spend on vehicle acquisition and fewer dollars to meet their monthly expenses.

Another factor that has affected BHPH dealerships is the tightening of lending standards by financial institutions. Tight credit is typically been good news for the BHPH dealer because as major finance companies rein in their lending, more customers turn to BHPH dealerships for financing.

In the past, this meant a better quality customer used to making the full payments — on time. This increased demand, however, can make it difficult for dealerships to manage their risk and ensure profitability. Exceeding their capital, making finance decisions outside of their proven parameters, not strictly adhering to collections best practices, and not watching their expenses can lead to quick, substantial, and financial losses that may prove catastrophic.

Overall, the current economic picture presents challenges and opportunities for BHPH dealerships. However, dealerships that can adapt to the changing market conditions and remain competitive will likely thrive in the long run.

Michelle Jackson - Vice President of Sales - Advantage GPS

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