The Truth About Reposessions

Everyone seems to be searching for the secrets to eliminate repossessions and charge-offs in the buy here-pay here business. They look to scoring models, starter-interrupt devices, GPS devices, superior software and other technologies to solve the problem.

First, let’s discuss this “problem.” You are in the business of lending money (financing autos) to the bottom tier of credit. Is it even remotely possible to hope that they will all pay? I say “No.” and moreover, it is not my intention to run my business with no delinquencies and no repossessions. It is my intention to originate as many loans as possible (what I can afford to lend) and manage my risk so that my loan success rate is maximized without missing any opportunities. This is a risk business. No, it is a HIGH RISK business. You use the above-mentioned tools and technologies to minimize the risk and, when used correctly, maximize the probability of loan success.

This is a business where the goal is to sell every customer 10 cars. The only way I know how to do that is to maximize the number of successful loans. The mistake too many dealers make is one where they try to avoid pain. They try to figure out who will pay, who will keep insurance, who will not wreck and who will not live up to our expectations. The common trait of these dealers and finance companies is they typically experience similar loss rates as the more aggressive dealers, but with stunted volume. That strategy is usually a losing one.

The most successful dealers and finance companies I consult with have some very specific and standard practices that work time after time. The first is developing a culture where they embrace the customer and all their shortcomings. They do not judge the customer, their lifestyle, and more importantly, do not spend a lot of time trying to mold the customer to conform to the dealer’s value system or beliefs.

It is the job of the buy here-pay here dealer to provide affordable transportation to the customer that no other financial institution will finance. It is not the job of the buy here-pay here dealer to improve the customer’s credit, better their life, change their habits or mold their character. Those are projects best left for the customer’s family, friends, ministers and parole officers. Once you accept this truth and work your system(s) around the realities of your customer’s circumstances and life, you will begin to achieve better collection results.

The use of technologies such as software (DMS), scoring models such as AutoZoom, starter- interrupt devices such as Passtime or OnTime, Internet websites such as Accurint.com and other products and services act as tools to create consistent results. None create “perfect” results. They can’t because our customers are not perfect: not even close.

The reasons for repossessions are fairly simple although the excuses for not paying seem endless. Customers stop paying for their cars because they cannot afford it, cannot pay or are not willing to pay for repair, or no longer need the vehicle. Too often collectors give the reason for repossession as “refused to pay.” This is unacceptable and in almost every case not true. They may be “refusing” to pay, but there is an underlying reason. They may have experienced a change in income, they may be upset about car repairs, they may not like the way you treat them but they are not just simply refusing to pay.

Sometimes they fail because of affordability. This is where the dealership put them in a payment they could not afford. This is called “dealer error.” It is your job to reasonably verify that the customer has enough income to afford the payment, plus insurance, maintenance and fuel. Do not expect the customer to know what they can afford. The second affordability issue is where the dealer hits the customer with an unreasonable pick-up payment. Again this is dealer error. Your customer will almost always agree to pick-up payments because they desire the vehicle and must agree to acquire the vehicle. Many of these people will make the pick-up payments by employing a losing strategy of ignoring their other bills and financial obligations. That ALWAYS catches up to them. The other affordability issues come from life/circumstance changes including job loss and divorce. These eventualities are the ones that we typically can’t predict. These are situations that no underwriting or collection tool can prevent. These are just the realities of doing business with people who live on the financial edge every day.

Also included in the life event reasons for repossession and charge-off are bankruptcies and car accidents. There are a few things we can do to mitigate these occurrences, but there is nothing we can do to prevent them. They are part of life for both our customers and us. We can review the customer’s financial situation during the underwriting process to look for signs of an impending bankruptcy such as high debt service and home ownership, but that is tenuous at best. We can demand full coverage insurance on all vehicles, but that does not ensure everyone will keep coverage. Even when they are covered, insurance companies only pay portions of the loan value. Regardless of your “insurance strategy,” there is little you can do to prevent your customers from wrecking cars. Again, this is a reality of your customer’s lives.

The most preventable “reason for repossession” is mechanical issues involving the vehicle.

You can and should create programs or services to tackle this common situation. These cars will break and you must be prepared to deal with it.

You can sell service contracts, offer a warranty, do side notes or split bills 50-50 — maybe all of the above, but you must be ready and WILLING to help your customer out in these times of need.

The second most important issue with mechanical problems is that you must act quickly to repair their cars. Every day without a car means days without pay, and days without pay means you will likely not get paid. This is a totally preventable situation and if you have repossession due to mechanical failure you have committed a dealer error once again.

What all this means is that while there is no way to know who will pay, and there is no way to guarantee anyone will pay. What you can do is thorough and standard underwriting, verification and loan closings to reduce the number of bad loans going out the door.

You can buy and recondition the inventory to lessen the likelihood of mechanical failure, as well create programs and services to deal with the inevitable repairs to the vehicle to eliminate that as a reason for repossession. You can also create an environment in the collection department where you do everything and anything to help your customers keep their cars and reward collectors for successful loans and not for delinquency rates. If you do the above you will find that your repossession and charge-offs are manageable and predictable. If you can predict and manage losses you can win the buy here-pay here game.