Buy-Here, Pay-Here Poised to Grow in 2018, Black Book Says

Buy-here, pay-here dealers could “get back into the mix” of auto financing in 2018 after being largely shut out by increased bank competition, Anil Goyal, executive vice president of operations at Black Book, told Auto Finance News.

In the first quarter of 2011, buy-here-pay-here dealers held a market share of 9.5% of used financing and had dropped to 6.2% market share by 3Q 2015, according to data from Experian. However, since then the deep subprime financiers have grown again to 11.6% of the market in the latest report showed. A lot of that growth can be attributed to competition falling off, Goyal said.

During the recovery from the Great Recession, many banks and newly formed independent finance companies extended credit to subprime and deep subprime consumers looking to purchase vehicles. The increased competition largely pushed out buy-here-pay-here dealers because they often have more unfavorable interest rates.

“The subprime market grew because the larger banks became full spectrum lenders and now they are being told that if you want to continue to grow in subprime there will be more regulations and ultimately more volatility,” he said. “So they are limiting their risk appetite as both their shareholders and regulators are asking them to do so.”

It’s not just banks such as Wells Fargo Dealer Services and Santander Consumer USA tempering their involvement in subprime, but also the independent lenders. Losses among private equity-backed lenders have risen near levels not seen since the recession and that has triggered a pullback from providers such as Exeter and Flagship Credit Acceptance as well.  

“As we saw losses in that sector tick up last year, that funding is no longer flowing freely and there is more scrutiny around it,” Goyal said. “Buy here pay here had found it very hard to compete when you have a full-spectrum bank lender or a specialty subprime lender — BHPH tends to be more expensive, so it was difficult to compete. But as that market becomes less competitive it becomes possible for buy-here, pay-here to expand and address the needs of that customer.”