One of the first questions your new-car dealer clients will ask about buy here, pay here is whether they can sell vehicle service contracts for those units. They definitely can, but they’ll need your help to pick the right program and develop a new sales process.
As a portfolio buyer, I work with BHPH dealers of every size. Some sell as few as five cars a month; others sell upwards of 150. But only 10 to 15 percent of them sell service contracts (or warranties — more on that later) with any regularity. To understand why, you have to understand the mentality of the BHPH dealer: They have a hard enough time collecting $75 from each customer every week. They figure that adding a service contract is going to jack up the price and make collections even harder.
Fair enough. But my question to them is, “What happens to your collections when the engine blows up?” Some dealers put the customer in another car. Others offer to split the cost of the repair or tack the total cost onto the back of the loan. That’s called a “side note,” and, frankly, the whole concept is flawed.
When you’re selling a vehicle to a bad-credit customer, the last thing you want to do is extend the term. And as a portfolio buyer, when we do our due diligence, we often find that the dealer has continued to apply payments only to the principal, saving the side note for the end. It’s not illegal, but it’s not exactly attractive, either.
The best approach is to find a product that works for your dealer’s BHPH operation and use it to protect your dealer’s financial interest and their customers’ investments. If you can master the concepts I’ve listed here, you’ll have the opportunity to earn your clients’ trust and confidence — and business — by making suggestions that benefit their operations.
1. Understand the product. The first step is to educate your dealers on the difference between a service contract and a warranty. A service contract is a promise to perform (or pay for) certain repairs or services. They are sometimes called an “extended warranty,” but a service contract is not a warranty as defined by federal law. A service contract may be arranged at any time and always costs extra; a warranty comes with a new car and is included in the original price.
2. Make it stick. Service contract providers that cater to the BHPH segment understand that repossessions are par for the course. It may take a phone call or two, but some will allow the dealer to transfer a service contract to the new owner of a repossessed vehicle without charging for a new contract.
3. Forget the markup. In new-car and traditional used-car sales, a bank has no problem financing the sale of a service contract and marking it up to help the dealer make a profit. On the BHPH side, you have to sacrifice some of that markup to protect the dealer’s investment.
4. Ask questions. Here’s a list of questions to ask service contract providers as you try to find the right partners for your dealers:
• What claims-to-premium rate is considered too high?
• When does the VSC take effect with regards to delivery date?
• Will the customer be charged a deductible for repairs?
• Does the service contract come with a roadside assistance plan?
• Will the service contract provider pay claims for repairs performed at the dealership’s own service department?
5. Vet the providers. One of the most important questions regarding the service contract program is who underwrites the program. The new BHPH dealer must research each and every company they are considering doing business with. Are they registered in their state? Have they met all the state’s requirements? Do they belong to and actively support that state’s independent dealer association?
6. Put the customer first. Try to incorporate the cost of the VSC into the pricing of the vehicle, and don’t overcharge. The customer will see the added benefit and appreciate not having to put up any additional funds at delivery time. When repairs are needed, help with the scheduling and refer them to shops that you personally recommend. Remember that both sides have a financial interest in the vehicle. This will help build that customer/dealer relationship and create repeat sales as well as referrals.
At the end of the day, the customer will judge the dealer by the manner in which claims are handled. We have an old saying in the BHPH business: “If the car performs, the loan will perform!”