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Rising Vehicle Supply Benefiting BHPH Dealers

July 17, 2012

Vehicle supply is no longer an issue for special finance dealers, but finding a finance source willing to lend on these older, high-mileage vehicles is. The situation, said Ricky Beggs, analyst with automotive research company Black Book, is playing right into the hands of the buy-here, pay-here (BHPH) segment.

The subprime segment continues to replace the approximate 750,000 units lost during the federally mandated Cash for Clunkers program in 2009, but the age and amount of miles on vehicles coming back to the market has created a domino effect that will hamper the efforts of new-car dealers.

“The quality of those trade-ins is at a different level than what we’re accustomed to,” Beggs said. “At the time (Cash for Clunkers-era), people didn’t trade for three to four years during the tough economic times. Now that they’re coming back into the marketplace, the vehicles they’re trading in are two, three, four years older, which means two, three, four years’ worth of more mileage — maybe 40,000 to 60,000 more miles than what would have gotten traded in three or four years ago.”

Beggs believes the industry is on track to sell about 1.5 million additional units in 2012 than in 2011. He also believes that 60 percent of those new-vehicle sales will involve a trade-in, which Beggs said will equate to about 900,000 vehicles landing back on dealer lots. Given the decline in quality of trade-ins, this situation could pose a costly problem for franchised dealers, who will be forced to make those vehicles available to special finance and BHPH dealers through the wholesale market.

The problem is traditional financing sources are unlikely to lend on cars with more than 100,000 miles or on models older than 2005. The only exception is diesel cars, which Beggs said lenders view as having more engine-life remaining than normal gasoline-engine cars.

Beggs said BHPH dealers also will benefit from falling wholesale prices for these high-mileage vehicles. In 2009, he noted, the Cash for Clunkers program caused wholesale prices to jump from $2000 per car to around $4,000 and $5,000. This year, he expects wholesale prices on these vehicles to fall to around $3,000.

 “This gives the buy here, pay here guys the chance to either: make a little more gross (profit) or they will be able to sell a few more cars because they’re not as expensive,” he said.

Beggs, however, said the trend should reverse in upcoming years. “I think we’ll see this pattern continue in the next year. Then, in 2014, we’ll see people get back on a more typical trading pattern,” he said, adding that the industry should realize a SAAR of 16 million units by 2015, “unless the economy continues to struggle, but I don’t see that being the case for that long of a period.”

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