The costs associated with delinquencies and repossessions are well known to anyone trying to collect in the “C-” and below credit classes. However, if you don’t mind higher-than-necessary delinquencies and losing money, no need to read further.

The buy-here, pay-here (BHPH) and lease-here, pay-here (LHPH) models are all about collections, not vehicle sales. Over the years and through intense experience, one thing is for certain: We must understand the behaviors and habits of this customer segment in order to collect successfully. Anyone can sell, but collecting is an entirely separate issue.

Many dealers use lien holders or lessors, or use starter interrupts, locator systems or a combination of the two to strengthen their collections efforts. In some cases, these systems are used in place of good underwriting practices, which is not a recommended practice. These systems will perform well, but they are not magic bullets. If you agree, then keep on reading.

Understanding Payment Assurance Systems

Underwriting for ability and willingness is always recommended, just like selling vehicles that have a reasonable life expectancy and keeping payments in line with income. Payment assurance systems do work, but they shouldn’t take the place of good underwriting practices.

A recent trade publication indicated that fewer dealers utilized payment assurance systems in 2008 than in 2007. I find that impossible to accept. I currently sit on the board of the Payment Assurance Technology Association. Among our members, which include all of the major players in the segment, each one is experiencing increases in unit sales and in the number of active and new accounts.

But back to the issue at hand, payment assurance systems are vital tools when used properly. And these devices do empower dealers much like telephone and utilities companies are  when it comes to delinquency. But the fact is the GPS-locator functions these devices tout are the least used feature. That’s because the location of the asset does not get the money in house, which is the primary goal when it comes to special finance.

Reducing Losses and Collections Staff

When it comes to special finance, it really does come down to behavior modification. Professionals in this arena say that if you don’t work to change your customer’s behavior, sometimes regularly, habits will not change.

That’s why two things need to happen in order to alter a special finance customer’s behavior. The first step is early detection and communication (reminding). The second step is intervention, which requires additional reminders, as well as consequences. Add these two steps together and you get prevention. And prevention equals profits for you.

In the collections arena, successful collections professionals practice this strategy everyday, because the results of preventing delinquencies and reducing charge-offs is worth the effort.

The folks doing benchmarks and static pools tell us that BHPH-level paper should be 72 to 75 percent current (see chart below). However, there are companies out there that are running over 90 percent current on “D” or below paper. Keeping customers current at levels like that means you can reduce collections staff by half or more.


Early Warning Systems

So, if you are tired of the same old, same old, or your numbers are equal to the benchmark shown, read on. If not, thanks for your time and good selling. But if you are interested in further reducing losses and selling or financing more vehicles, then stay with me.

There are some pioneers and innovators in the payment assurance industry that have developed systems that not only help to modify behavior, but also increase the likelihood of collecting customer payments.

These proactive and preemptive communication systems employ automated text messages, e-mail, outgoing phone calls, and vehicle buzzers when situations escalate. Basically, these systems provide the early warnings to keep your customers current, and they do all the “heavy lifting” by handling all the communications when they’re not.

Users of these systems say they have increased their business by 20 percent. Some dealers even say these preemptive technologies have allowed them to go from 80 percent current to 92 to 97 percent current.

Payment assurance technology is definitely a key component to a special finance operation, but it’s only part of the equation. Remember, the key to special financing is making sure your customers are current on their payments, which is why a successful operation requires good underwriting practices and a preemptive communications system.

Ashley Herndon is a founding partner of the Irvine, Calif.-based payment assurance technology provider Crossbow Group Inc. E-mail him at [email protected].