Buy here, pay here
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used car A used car, a pre-owned vehicle, or a secondhand car, is a vehicle that has previously had one or more retail owners. Used cars are sold through a variety of outlets, including franchise and independent car dealers, rental car companies, buy h ...
market in the
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and
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
, buy here, pay here, often abbreviated as BHPH, refers to a method of running an automobile dealership in which dealers themselves extend
credit Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt) ...
to purchasers of automobiles. Typically, purchasers of cars at BHPH dealerships have poor credit history, and loans have high interest rates. BHPH can provide options for those unable to meet credit standards elsewhere.


History and background

The BHPH Industry originated primarily in the early 1970s during the United States savings and loan crisis. With many similarities to the
financial crisis of 2007-2010 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...
credit was difficult to obtain,
unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...
was rising & the economy was still in a transformation from a production-based economy to a service-based economy. Automobile dealers who still wanted to sell cars had to find a way to deal with the increasing price of vehicles relative to income. They had to sell these vehicles to wary
consumer A consumer is a person or a group who intends to order, or uses purchased goods, products, or services primarily for personal, social, family, household and similar needs, who is not directly related to entrepreneurial or business activities. ...
s who were unwilling or unable to pay cash for the new purchase at the point of purchase. In many cases, when banks would not lend to the consumer, the automobile dealer would start a related finance company (RFC) and have the
finance company Financial institutions, sometimes called banking institutions, are business entities that provide services as intermediaries for different types of financial monetary transactions. Broadly speaking, there are three major types of financial insti ...
approve the loan on the vehicle. This represented a step into the consumer finance business for automobile dealers. The advantage to the dealership of having an RFC finance was decreased risk on the sale and finance of the vehicles sold. Since both the RFC and the dealership had the same ownership, the owners could benefit from the profit on the sale of the vehicle and the profit on the
loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...
for the vehicle. Historically, the down payment required on a BHPH loan was generally larger than the total profit on the sale of the vehicle. Therefore, if the buyer didn’t make payments, the RFC could repossess the vehicle and sell it again at the dealership. Since 2008, many outside lending institutions have entered the market and the average down payment on a BHPH loan has significantly decreased, as dealers try to maintain a share of the market.http://www.sgcaccounting.com/Resources/BHPHBenchmarks2013.pdf Many of the benefits of separating the RFC out from the BHPH dealership are based in the tax code changes of the
Tax Reform Act of 1986 The Tax Reform Act of 1986 (TRA) was passed by the 99th United States Congress and signed into law by President Ronald Reagan on October 22, 1986. The Tax Reform Act of 1986 was the top domestic priority of President Reagan's second term. The ...
. The Act restricted any companies that utilize inventory in their operating business from using cash accounting.


Issues

Due to the high upfront cost of securing inventory, automobile dealerships frequently have a problem managing their cash flow. Often, used car dealerships purchase inventory using a retail floorplan, a type of specialty
line of credit A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A line of credit takes s ...
, that typically requires the automobile to be paid off in full within 90 days of purchase. This means that automobile dealers use loans to finance their operations and therefore have an interest in selling vehicles as quickly as possible in order to use the proceeds to pay off the loan rather than paying off the loan out of their working capital. One difficulty that this presents to BHPH dealers is that when they sell a vehicle to a BHPH customer the RFC needs to produce the loan funds so the dealership will have the funds to pay off the line of credit on that automobile. Often a ‘cash crunch’ is a primary reason for dealerships to go out of business.


Regulations in the United States

Related finance companies are not regulated as strictly as banks by the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
, rather they are regulated by the Department of Financial Institutions or Department of Commerce on a State level depending on the State. Regulations may include maximum
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
, late fee amounts,
grace period A grace period is a period immediately after the deadline for an obligation during which a late fee, or other action that would have been taken as a result of failing to meet the deadline, is waived provided that the obligation is satisfied durin ...
s and so forth. Some of the companies that have started as RFCs have grown large enough that they became Industrial Banks which are
FDIC The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures credi ...
Insured banks owned by non-financial institutions.


References

{{Reflist Auto dealerships Used car market Payment methods in retailing