we buy auto notes

What is Collections, Anyway?


By Chuck Bonanno
July 2007

The car business is a funny business. The buy-here, pay-here business is a nutty business. While it's true that buy-here, pay-here is associated with the car business, it is not "really" a car business. Yes, you sell a car to start the ball rolling but you don't make any money until customers make payments. So keeping that fact in mind, the business is actually a finance and collections business. And more to the point, your money will be made from quality collection of the note far more often than from good underwriting or good selling. The car is just the security and the instrument to make a loan. I don't mean to offend buy-here, pay-here sales associates but selling a car to a customer who has limited funds, poor credit, an unstable lifestyle and few buying alternatives, is not that difficult. Most sales associates are heroes to the customer because they provide them credit in which to buy the necessary transportation they seek when nobody else will. The most important skills of a good buy-here, pay-here associate are that they be energetic and friendly. The buy-here, pay-here selling system does not revolve around attaching emotion to a vehicle, pricing, rate or the need for back-end profits normally associated with a car deal. In buy-here, pay-here, there is no negotiation on price or interest rate, and you dictate the car(s) a customer can buy so there are very few if any real objections to overcome during the selling process. There are few, if any, F&I products to sell (you would have to finance them anyway) and the customer typically does not come to the lot to price cars, they come to buy. The biggest objection is down payment. But being the bank means you can bend that rule and do so a lot. I do not want to belittle the process or skills required here because without the retail purchase there is no note to collect. I just want to shift your paradigm by adding that the real selling has yet to take place. The real selling begins once you have sold (retailed) the vehicle and it is time to begin collecting payments. The truth of the matter is that you don't earn profits until deep into the life of the note. For example: if you have $4,000 cash-in-deal (total cost of car, less down payment plus closing costs) and another $2,400 in operating expenses associated with each retail sale, you must collect $6,400 before you truly are making profits on the deal. If you collect $320 per month you will earn true profits when the customer has paid through the 20th month. So, by my calculation, you have to get your customer to make 20 monthly (43 bi-weekly or 86 weekly) payments before you see a profit. The burden to convince a customer that it is important and in their best interest to make all those payments fall on the shoulders of the collectors. How do they accomplish this feat? It's simple: they sell. Collectors are the sales associates in a buy-here, pay-here operation. They must overcome countless objections and negotiate with hundreds of customers every day, and do so on every payment for as long as three or even four years. Full Article

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