Buy Here Pay Here (BHPH)
What Is Buy Here, Pay Here (BHPH)?
The term "Buy Here, Pay Here (BHPH)" alludes to car dealerships in which the financing for the vehicles purchased is finished in-house. These types of dealerships are regularly involved in the sale of vigorously utilized cars, and they will generally take special care of customers with somewhat poor credit ratings.
How Buy Here, Pay Here Works
The majority of auto dealerships concentrate on generating new sales; they delegate the financing portion of their business to a third-party provider. In the case of dealerships affiliated with a major automotive brand, this financing may be extended by an affiliate of the manufacturer itself. In different cases, the dealership could utilize dedicated lease financing companies that are not affiliated with the vehicle manufacturers.
BHPH dealerships are an exception to this basic guideline since they give their own lease financing themselves. The benefit of this approach is that the BHPH dealership can partake in the interest revenue associated with their leases. Then again, these dealerships might be inclined to cash flow issues. All things considered, the price received for the cars that they sell is loosened up over the life of the vehicle loan.
The BHPH business can be particularly troublesome assuming that it is geared toward subprime borrowers. BHPH dealerships have been known to offer flexible terms, for example, 0% down payments, no-interest financing periods, and loans with practically no preliminary credit check. Albeit these measures could all the more promptly create new business, they can likewise increase the default risk of the business. Subsequently, these flexible loan terms can fundamentally undermine the dealership's long-term profits.
Illustration of Buy Here, Pay Here (BHPH)
David is the owner of a trade-in vehicle dealership. He is seeking to extend his current customer base. He has found it hard to contend with the brand-affiliated dealerships in his neighborhood marketplace, who will generally draw in his locale's more well-to-do customers. With an end goal to extend his revenues, David chooses to concentrate his marketing strategy on subprime customers who might not be able to manage the cost of the financing terms offered by his bigger and more traditional contenders.
Keeping that in mind, David begins offering flexible financing terms on an in-house basis, really becoming a BHPH dealership. He takes out an ad in several nearby papers, offering "no money down" utilized cars to customers with awful credit. He doesn't need a preliminary credit check. To take care of business, he offers a six-month without interest period.
That's what david reasons, in spite of the fact that he will probably experience higher default rates than his rivals, he can compensate for this risk by charging generally high interest rates. He likewise intends to forcefully repossess cars from customers who fail to make convenient payments. To support that strategy, he even thinks about installing trackers and different gadgets onto the cars to recognize them and to deliver them inoperable assuming the customers fail to pay.
- While the buy here, pay here business model can create extra interest revenues, it can likewise deliver cash flow issues as a result of the delayed receipt of cash and the increased risk of default.
- Buy here, pay here alludes to a type of vehicle sales center that gives financing to its customers in-house.
- Most vehicle sales centers depend on third-party financing firms.