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Tag Archive: Tax Season

Dustin Kerr

Watch Out For Tax Season Temptations

Car taxes  design

It’s that time again. Right now, buy-here, pay-here dealers are in their busiest time of the year: tax season.

Although most dealers will tell you that tax season is not nearly as crazy as it used to be, there’s no denying that it’s still a major event in our business. BHPH dealers are likely to sell more cars—and collect more cash—in the next couple of months than any other month for the rest of the year.

Tax season means buyers, but what kind?

Sadly, it’s not all good news. It’s during tax season that we put our worst performing paper on the books. Flush with income tax returns, people walk into our dealerships with $1,000, $2,500, maybe even $4,000 or more down. And, just as giddy as our buyers, we completely forget about our underwriting guidelines and the fact that we are still going to have to collect on this account for the next two to three years.

Now, some dealers simply don’t care how well the paper performs. They feel that the cash down overshadows the risk of bad underwriting. And, many argue, they will just get the car back quickly if the customer defaults.

Now, I don’t entirely disagree with this philosophy. There is a certain point where the amount of cash down mitigates the risk involved. However, I always tell my consulting clients that there’s a way to do both—get the large cash down payments and properly underwrite each loan to ensure the highest probability of success.

And that approach, I think, is better.


Don’t lower your standards

The first thing we need to do? Slooowwww dooowwnnn! Hey, I get it. This time of year is very hectic, not only with sales but also with collections. It’s very likely we have more people in our lobby right now than any other time of the year.

When things start to get a little crazy, though, usually the first thing to suffer is attention to detail. Go back and look at the applications that were collected during tax season the last couple of years and compare them to applications collected during the rest of the year. If yours is like most dealerships, you’ll see a significant difference in the quality of information collected.

You need to discuss this situation with your staff ahead of time. Make it very clear that incomplete applications will not be accepted. (And, I mean be stern about it: It’s non-negotiable!)

Remember, you have to collect on this account for the next few years. A quality application is the first step to making sure you can do that.

The next thing I usually see that sets us up for failure is a complete disregard for payment to- income percentages. We all know by now, or should know by now, that accounts with payments greater than 25 percent of net income perform at a much worse rate than those with payments below 25 percent net income.

I’ve found that dealers and managers forget this rule when a large down payment is made. The attitude seems to be, “If they have skin in the game, they’ll make all the payments.”

Sad news, friends, but this just simply isn’t the case with most customers.


Don’t forget that tax money is free money

Here’s an important lesson I’ve learned after reviewing hundreds of thousands of loans over the years: The down payment amount has very little to do with how well a loan performs.

As far as our customers are concerned, that sizeable tax return is just free money. This sudden windfall isn’t a result of careful budgeting or pinching pennies for a down payment. No, it’s a bonus with very little emotional attachment.

Don’t compromise your payment to income standards just because the customer has a big down payment. Remember, all that tax money will be spent very soon, and they will only have their weekly paycheck available to make their car payment.


Don’t forget the delivery and closing process

Another area I see slip during tax season is the closing process. I consider the application and closing to be the most important aspect of the collections process. And, if you’ve ever read my articles, watched my BHPH Tip of Month video segments, or attended one of my training or consulting sessions through NCM, you know that I firmly believe that an improperly closed loan is a charge off waiting to happen!

In this busy time of year, it may seem like a simple solution to ask our commissioned sales team to close the loan instead of a manager or a collector. Sure, it might speed up the process, but the whole point of having a manager or collector close the loan is to double check and ensure that the salesperson hasn’t missed or skipped an item because they were afraid of losing a deal.

Don’t do be tempted to “streamline” the close; you’ll just pay for it later. Keep your processes intact, and have a dedicated person or team well-trained in the closing procedure review every application. And never let them veer off track just because you are busy.


Make the most out of tax season

I know how exciting this time of year is, but you can’t afford to be burned. Remember, these could be the worst-performing deals you make all year.

Make sure you have a great application process in place, follow your payment-to-income guidelines and don’t short-cut your closing procedures. If you do these three things, you can enjoy the cash windfall of February and March without the headaches that come in July and August.

Article originally published in the January/February 2016 issue of the BHPH Report. Be sure to check out the full issue!


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Brent Carmichael

Tax Season 2014…How Did It Stack Up for Buy-Here-Pay-Here Dealers?

BHPH Dealers, how was your tax season?Another tax season is on the books. This one, as with last year’s, is showing very mixed reviews. Delayed returns that were sporadic at best, and even more competition for the almighty tax dollar made this another head scratcher of a tax season for BHPH dealers. Add to that, 67% of those polled in a USA Today survey said their number one priority for their tax return would be to pay bills and reduce debt. It’s starting to look like the heyday of tax season may be a thing of the past.

Sales volumes were down 1.3% from 2013. Now that doesn’t sound like much, but when we look at the previous three years, it is the second year in a row of reduced sales for tax season. The last year there was an increase was 2012 over 2011 at a paltry 2.8%. But even this is not that great, in that 2011 was down from 2010. That gives us four straight years of volume decrease.

One of the main contributors to the recent declines seems to be sub-prime and special finance. They seem to be still very aggressive in financing what in the past has been a true BHPH customer by offering very competitive rates and terms that seem to make little to no sense. In past years, sub-prime/spi fi has come into our space fairly aggressively, but as soon as performance started to suffer, exited quite quickly. Their current volumes seem to be outrunning any performance issues. And with the cost of capital at all-time lows, they may be sticking around a while longer before performance chases them off.

The other main contributor I believe is the USA Today survey I mentioned. In the past, our customers had their tax returns spent on what would be considered “luxury items” before they were even received – things like furniture, TV’s, clothes, etc.  Now it seems their focus has been catching up bills and paying off their vehicles. They are starting to see the benefit of not having a weekly car payment. Vehicle quality has contributed to this as well. Vehicles are simply lasting longer. This is something that will continue to directly affect repeat business.

It goes without saying that if volume is off then profitability must be off as well. There is a little good news here in that dealer profitability was off by only 8% from 2013. And the good news would be that 2013 profitability was down almost 15% from 2012, with volume off not even 1% from 2012. What does this mean? Dealers are still optimistic that there will be a tax season. They are still gearing up for it, but have a little more realistic expectation for this year. Dealers were possibly a little gun shy after the 2013 tax season when indications pointed towards a strong tax season. Once bitten, twice shy as they say.

Early indications are that the average tax return was down only 3% from last year. Remember the USA Today survey? Good news from a collection standpoint, right? Not so much. 30+ delinquencies were the highest since 2010 at 5.3%. And the average loss went up for the fourth straight year with the average cost of vehicle sold almost flat for the past three years. What does it all mean? We’re dealing with a lower tier customer due to increased competition, not only from sub-prime, but from other BHPH dealers that have either entered the business or expanded their footprint to more markets. Not to mention a customer that seems to have very lofty and sometimes unreasonable expectations due to the increased competition.

I have had the privilege and honor to be a part of the deep sub-prime industry all of my professional life, 25 years now and counting, with the past 17 in BHPH. I am still very encouraged by the future of this industry. A few tax seasons that haven’t matched past ones don’t bother me one iota. All industries have career years and seasons. The successful ones adapt and persevere and more than make up for the non-career years and seasons.

Brent Carmichael is a popular speaker, trainer and consultant to Buy Here, Pay Here dealer-operators, as well as an executive conference moderator for NCM BHPH 20 Groups.  He’ll be speaking and participating in a number of sessions and panels at NABD’s 2014 Dealer Compliance and Conference May 18-22 at the Wynn Las Vegas. Visit Brent at the NCM booth at both events to have your BHPH questions answered!

NCM Institute Used Vehicle Management and Service Management classes are coming to Detroit in June.


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