Gary Tillery wants every customer who walks into his J.D. Byrider used-vehicle lot in Albuquerque, N.M., to drive off in a vehicle they will pay for and like.
So his employees, called underwriters, interview all customers and assess their ability to repay vehicle loans. The employees also try to determine how much customers can pay and their willingness to pay.
That’s important because as a Byrider buy-here, pay-here franchisee Tillery funds his customers’ loans himself through his own finance arm. The finance arm uses software and practices supplied by CarNow Acceptance Co., a division of Byrider Franchising.
Loan structure, management and collection are crucial for success, he says.
“We have to have confidence there is a reasonable chance they will complete the loan term,” says Tillery, who also is dealer principal of Tillery Chevrolet-GMC and Tillery Buick-GMC in suburban Albuquerque.
Tillery would not say what percentage of his buy-here, pay-here customers default, but he says he is shooting for 22 percent.
“Almost all will pay at least one day late sometime during the loan,” he says. “It’s strictly the underwriting and collection side that makes you profitable.”
Buy-here, pay-here stores specialize in selling older vehicles to customers who have poor credit.
Many new-car dealers are turned off by the buy-here, pay-here used-car segment because the business model calls for dealers to finance the vehicles they sell and the loan default rate is high. Profitability hinges on how well dealers manage and collect their loans rather than the number of vehicles they sell.
But that hasn’t stopped some new-car dealers, such as Tillery, from taking the plunge or Byrider from actively pursuing them to become franchisees.
Of Byrider’s nearly 160 dealerships, 66, or about 40 percent, are operated by people who also run new-car stores. Tom Welter, Byrider vice president for franchising, says the company pursues franchised new-car dealers because those dealers know the used-car business, are generally well-capitalized and have a desire to grow.
“Over the last two years, half of the stores we’ve opened have been opened by new-car dealers,” Welter says. “That trend continues in 2014. I personally believe that our new-car dealers will represent 70 percent of the system at the end of five years.”
25% default rate
Byrider franchisees can expect a loan default rate of about 25 percent.
That’s still considerably lower than the 37 or 38 percent default rate that dealers in the buy-here, pay-here industry can bear before sustaining losses, says Jack Humbert, Byrider vice president for franchise sales. Byrider franchisees’ five-year average annual net income from operations is $818,201.
Byrider dealers are required to have a minimum of $1 million in liquid capital to invest in their businesses. Dealers also pay a one-time $50,000 franchise fee plus monthly royalty, advertising and other fees.
In return, Byrider helps dealers set up their operation, including their financing arm, and helps train their employees. It also helps dealers get a bank line of credit to support their businesses, Humbert says.
Jonathan Gandolfo is managing partner of the company that owns Dodgeland of Columbia and JTs Kia in Columbia, S.C., JTs Chrysler-Jeep-Dodge-Ram and JTs Fiat in Lexington, S.C., and three Byrider stores in South Carolina.
Unlike traditional dealerships, the finance departments and service departments in Gandolfo’s Byrider stores are not profit centers. They exist to keep the vehicles running and customer payments coming in.
“If the vehicle doesn’t run, they’re not going to pay,” says Gandolfo, whose default rate is about 16.5 percent. “That’s the very first principle of buy-here, pay-here.”
Gandolfo, like all other Byrider franchisees, offers a standard minimum 24-month/24,000-mile service agreement that covers major components such as the engine and transmission. Unlike most other franchisees, though, Gandolfo offers the agreement as an itemized service contract for $995, with a $25 deductible. The “vast majority” of his customers buy the service contract, Gandolfo says.
Ninety-five percent of Byrider dealers offer the 24-month/24,000-mile service agreement, or one for 36 months/36,000 miles, as a warranty that is included in the price of the car, Humbert says.
Byrider stores are supported by Discover, a proprietary dealer management software system designed for Byrider dealers, Humbert says.
Discover helps dealers acquire used-vehicle inventory and oversees sales and service.
It also has risk management tools, handles loans, integrates with the three major credit reporting bureaus and manages collections to support dealers’ CarNow Acceptance Co.-related financing arms.
“They are the bank,” Humbert says of Byrider dealers. “In our business model there is no need for an outside source or third-party lender. The Discover system comes with the franchise.”
Humbert says the system analyzes customers’ loan applications to make sure they can afford a car loan. It creates budgets by considering factors such as credit history, how often they get paid, rent or mortgage payments and groceries. Recurring monthly expenses, such as cellphone bills, are considered, too.
The Discover system’s need-analysis tool makes sure that a family with, say, four children, winds up in a roomier vehicle, such as minivan, rather than a two-door subcompact car. Managers also take into consideration applicants’ attitudes toward their credit situation and paying bills.
About 35 percent of the Discover system’s recommendations are credit approvals.
Many applicants who are turned down are advised to come back when certain conditions are met, Humbert says.
“Maybe they just filed for bankruptcy and we need to wait for the bankruptcy to discharge,” he says. “We want to educate them about how they can get into the program. We want to make sure they have the ability to succeed.”
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