It’s that time again. Right now, buy-here, pay-here dealers are in their busiest time of the year: tax season.
Although most dealers will tell you that tax season is not nearly as crazy as it used to be, there’s no denying that it’s still a major event in our business. BHPH dealers are likely to sell more cars—and collect more cash—in the next couple of months than any other month the rest of the year.
Tax season means buyers ... but what kind?
Sadly, it’s not all good news. It’s during tax season that we put our worst performing paper on the books. Flush with income tax returns, people walk into our dealerships with $1,000, $2,500, maybe even $4,000 or more down. And, just as giddy as our buyers, we completely forget about our underwriting guidelines and the fact that we are still going to have to collect on this account for the next two or three years.
Some dealers simply don't care how well the paper performs. They feel that the cash down overshadows the risk of bad underwriting. And, many argue, they will just get the car back quickly if the customer defaults.
I don’t entirely disagree with this philosophy. There is a certain point where the amount of cash down mitigates the risk involved. However, I always tell my consulting clients that there’s a way to do both—get the large cash down payments and properly underwrite each loan to ensure the highest probability of success.
And that approach, I think, is better.
Don’t lower your standards
The first thing we need to do? Slooowwww dooowwnnn! Hey, I get it. This time of year is very hectic, not only with sales but also with collections. It's very likely we have more people in our lobby right now than any other time of the year.
When things start to get a little crazy, though, usually the first thing to suffer is attention to detail. Go back and look at the applications that were collected during tax season the last couple of years and compare them to applications collected during the rest of the year. If yours is like most dealerships, you’ll see a significant difference in the quality of information collected.
You need to discuss this situation with your staff ahead of time. Make it very clear that incomplete applications will not be accepted. (And, I mean be stern about it: It’s non-negotiable!)
Remember, you have to collect on this account for the next few years. A quality application is the first step to making sure you can do that.
The next thing I usually see that sets us up for failure is a complete disregard for payment-to- income percentages. We all know by now, or should know by now, that accounts with payments greater than 25% of net income perform at a much lower rate than those with payments below 25% net income.
I’ve found that dealers and managers forget this rule when a large down payment is made. The attitude seems to be, “If they have skin in the game, they’ll make all the payments."
Sad news, friends. This just simply isn’t the case with most customers.
Don’t forget that tax money is free money
Here’s an important lesson I’ve learned after reviewing hundreds of thousands of loans over the years: The down payment amount has very little to do with how well a loan performs.
As far as our customers are concerned, that sizeable tax return is just free money. This sudden windfall isn’t a result of careful budgeting or pinching pennies for a down payment. No, it’s a bonus with very little emotional attachment.
Don’t compromise your payment-to-income standards just because the customer flashes a big down payment. Remember, all that tax money will be spent very soon, and they will be left with only their weekly paycheck to make their car payment.
Don’t forget the delivery and closing process
Another area I see slip during tax season is the closing process. I consider the application and closing to be the most important aspect of the collections process. I firmly believe that an improperly closed loan is a charge-off waiting to happen!
In this busy time of year, it may seem like a simple solution to ask our commissioned sales team to close the loan instead of a manager or a collector. Sure, it might speed up the process, but the whole point of having a manager or collector close the loan is to double check and ensure that the salesperson hasn’t missed or skipped an item because they were afraid of losing a deal.
Don’t be tempted to “streamline” the close; you’ll just pay for it later. Keep your processes intact, and have a dedicated, trained person or team, fluent in the closing procedure, review every application. And never let them veer off track just because you are busy.
Make the most out of tax season
I know how exciting this time of year is, but you can't afford to be burned. Remember, these could be the worst-performing deals you make all year.
Make sure you have a great application process in place, follow your payment-to-income guidelines, and don’t short-cut your closing procedures. If you do these three things, you can enjoy the cash windfall of February and March without the headaches that come in July and August.
Learn more from our BHPH experts in a BHPH 20 Group or BHPH NCM Institute course. Article originally published in the January/February 2016 issue of the BHPH Report.