National Alliance of Buy Here Pay Here Dealers
MARCH 2012 – PAYMENT DEVICES AND THE BHPH CONSUMER NABD WHITE PAPER
Since the advent of payment assurance devices in the “Buy Here Pay Here” (“BHPH”) marketplace, many of the survey respondents who have used them experienced reductions in consumer defaults and repossession rates. In October 2011 the National Alliance of Buy Here, Pay Here Dealers (NABD) completed an on-line survey of operators (including both dealers and finance companies) which focused on the benefits to consumers from the proper use of payment assurance devices. The study included responses from 119 operators and users of more than 110,000 units. For purposes of this study the definition of payment assurance devices included both starter disablers (also known as starter-interrupt devices both with and without a payment reminder feature) and Global Positioning Systems (GPS). Some of the GPS systems surveyed also included starter interrupt functionality which allows for enabling or disabling vehicles remotely.
The survey was discussed during the NABD East Coast BHPH Conference in Atlanta, Georgia on November 6-8, 2011. During this conference experts from many of the nation’s leading device providers discussed the survey results and answered questions from more than 800 attendees.
This white paper summarizes the more important findings contained in the survey and provides new insights into the benefits to subprime car buyers who utilize them. NABD has no economic interest in any payment device provider and received no compensation (either directly or indirectly) for conducting this survey. The results were independently correlated and compiled by Zoomerang™ – an independent contractor hired by NABD.
As GPS tracking and disabling devices gain penetration within the BHPH industry and with other subprime automotive financers, there is increased focus on the impact of these devices on the consumers who use them. The initial impressions of proponents and those who oppose the use of these devices were that they are manufactured and sold for the exclusive benefit of the financer, to the disadvantage of the consumer. However, as shown in the NABD survey study, these devices have numerous positive consumer benefits. Based upon responses to this survey, the use of these devices benefit consumers by allowing the financer:
- To finance customers with smaller down payments
- To sell higher value (ACV) vehicles with lower risk to buyers who might not have otherwise qualified for these purchases
- Greater flexibility in credit granting decisions resulting in more vehicles being sold to persons who might not have otherwise qualified for the financing
- To reduce delinquencies and defaults by buyers, thereby lowering repossessions
- To lower the cost of repossessions, which benefits consumers by lowering charge backs
- For financers who use starter disabler devices equipped with payment reminders that: Customers are generally responsive to the reminder warning
- Respondents overwhelmingly indicated that these devices reduce collection costs and enable collectors to handle more accounts
Success in the subprime auto finance industry is about managing risk. Financing consumers with lower credit scores usually means more risk to the financer. Although subprime customers often have lower credit scores due to life events like divorce or medical problems rather than from financial management issues, credit scores are the primary basis for assessing credit worthiness. Historically, lower scores typically are perceived to mean greater risk of default, and prudent operators seek to reduce or control this risk.
The primary purpose of payment assurance devices is to more efficiently manage and reduce collection risk by increasing the likelihood vehicle purchasers will make timely payments. In turn, financers who utilize these devices can electronically mitigate the inherent risk associated with financing subprime consumers with lower credit scores. Although the use of devices does not guarantee customer repayment, the majority of respondents to this survey reported that devices (both disablers and GPS) promote customer repayments and increase the efficiency of recoveries when customers do not pay. The ability of the financer to reduce risk benefits consumers in several ways.
First, the consumer benefits from the financers’ increased flexibility in credit granting criteria. Financers who utilize devices frequently broaden credit approvals as indicated by the survey. The NABD survey included the following question:
1. Do you believe the use of payment devices allows you greater flexibility in your credit
Yes - 84%
No - 16%
Clearly the majority of respondents felt that devices give them the ability to broaden their credit granting criterion. The installation of devices does not guarantee customer credit approval, but it does seem to increase the overall approval rate for consumers with low credit scores.
In addition to increasing the customers’ likelihood of getting approved, the survey indicates that operators are more willing to increase the amount of credit granted. If financers who use payment devices feel confident in their ability to control or reduce the risk of loss, they often approve larger contracts on higher ACV vehicles. Simply, financers are more comfortable originating larger contracts when they believe the risk of default is lower and the ability to recover the vehicle is greater when customers don’t pay. Respondents to the survey indicated they believe the use of devices provides both of these benefits as evidenced by the survey question and response:
2. Do you believe the use of payment devices allows you to sell higher value (ACV) vehicles
with less risk?
Yes - 80%
No - 20%
As shown above, most of the respondents indicated they can offer higher ACV vehicles when they use payment assurance devices. For customers, a larger amount financed (with a device vs. without) frequently makes a substantial difference in the quality, reliability, and type of vehicle they are able to purchase. The survey indicates that customers prefer to purchase higher quality vehicles with devices rather than lower quality vehicles without them (97% of respondents to the survey indicated consumers don’t object to the use of these devices and that customer tampering rates were generally less than 15%).
3. Do you believe the use of payment devices allows you to finance customers with smaller
down payments or deferred down payments (more so than without them)?
Yes - 80%
No - 20%
In contrast, without devices, financers in an effort to mitigate risk frequently require higher down payments, and these larger down payments generally reduce the number of consumers who can purchase vehicles.
Respondents also indicated that payment assurance devices reduce delinquencies and allow operators to recover vehicles more quickly and more inexpensively when customers do not pay, thereby reducing deficiency charge backs to defaulting buyers. As the use of devices has become more prevalent, operators have observed that consumers benefit from devices by building more positive repayment behavior, thus increasing their credit scores. For example, some GPS and many disabler devices include a payment reminder feature. While the features of payment reminders can vary between devices, they typically emit an audible tone to remind the customer of an upcoming payment. This warning promotes more timely and disciplined repayment by the customer.
The NABD survey polled respondents as follows:
4. My customers are generally responsive to the payment reminder warning:
Yes - 90%
No - 10%
As indicated, the overwhelming majority of respondents indicated that their customers react positively to these payment reminders. Respondents also recommend full disclosure, in writing, that payment reminders have been installed on the vehicles. Consumers believe that these reminders actually help them make more timely repayments. Making payments on time (whether on the customers’ own orin response to a payment reminder) builds more positive payment history. This positive performance, when reported to the credit bureaus, results in improved consumer credit scores.
The affirmative response rate suggests that these reminder warnings really do make a difference in customer repayment patterns thereby reducing delinquencies.
Currently, lower subprime auto consumers (with credit scores less than 550) face tougher challenges when trying to get approved for credit. However, financers believe that financing subprime consumers is more desirable provided that financers can control or reduce default risk. The aforementioned survey demonstrated that payment assurance devices can reduce default risk and mitigate losses from repossessions. Based upon the survey results, devices (both disabler and GPS) encourage consumer repayments, reduce collection costs and improve efficiencies in recoveries when customers don’t pay.
With risk reduced, financers are able to be more flexible with their credit approval criteria and more likely to finance larger contracts on better vehicles with lower down payments. The “Payment Devices & the BHPH Consumer Study” survey confirmed that these devices, when properly used and fully disclosed, benefit both financers and consumers. The repayment reminder feature encourages more timely repayment and allows consumers to establish more positive credit history.
For more information on payment assurance devices refer also to the NABD May 2011 Payment Device Study White Paper which can be downloaded free of charge at the NABD web site: www.bhphinfo.com.