Automotive

High-interest dealers among fastest-growing segments in industry

July 2, 2004

By TERRY BOX / The Dallas Morning News

Faded Ford Escorts rest alongside road-worn Chevy Cavaliers and other 100,000-mile sedans at PBR Inc.

Though the 80 cars on the lot are decent enough and the facility is tidy, this is clearly not the glamorous side of the auto industry.

PBR is a "buy here-pay here" lot that sells used vehicles at high interest rates, mostly to people with damaged or no credit. Most make weekly payments of about $70 on 10-year-old cars and trucks.

BRAD LOPER/DMN Buy here-pay here dealership owners Theresa and Robert Milligan sell to growing numbers of people who were once solidly middle class and now have damaged credit.

It may be a gritty glimpse of the future. Buy here-pay here, which comprises about 22 percent of the used-car business nationally, is one of the industry's fastest-growing segments and could account for 30 or 40 percent of its sales in a decade, some say.

"I'm like the last stop before you walk," said PBR owner Robert Milligan, who recently was named National Quality Dealer of the Year by the National Independent Automobile Dealers Association. "There's more of a need today than ever before."

Ten years ago, note lots – as buy here-pay here lots are also called – sold cars and trucks to people who had no established credit, most of them low-income people. Those buyers still frequent note lots, but the lots also sell to growing numbers of people who were once solidly middle-class and now have damaged credit.

In fact, the segment is beginning to stratify, with mid- and higher-end note lots that sell newer vehicles costing more than $10,000. A few even sell late-model cars and trucks priced at more than $20,000.

"We're no longer just talking blue-collar working people," said Michael R. Linn, chief executive officer of NIADA, which represents about 19,000 dealers nationwide. "We're talking doctors, lawyers. It's a growing industry because of what is going on economically, and the influx of immigrants. The common denominator is no credit or damaged credit."

The business is risky – note lots have a 30 to 40 percent repossession rate, Mr. Linn estimated, which is roughly 10 times the rate with conventional loans. But it holds appeal for dealers like Mr. Milligan because it's one of the more profitable segments of the auto industry.

Some new-car dealers have even established note-lot operations.

Most note-lot operators charge interest rates of 18 to 26 percent and often mark up vehicles 100 percent or more. Consequently, the gross profit on a typical note-lot vehicle is $3,772 – including interest income – compared with an average gross of $1,531 on a new vehicle, according to ADESA Analytical Services.

While margins of nearly 50 percent are attractive to new-car dealers, they say note lots serve another purpose in these debt-heavy times: They can help rebuild credit and, in the process, create loyal customers.

"I've had people tell me they've gone on to qualify for mortgages and really just started rebuilding their lives," said Ford dealer Jerry Reynolds, who sells about 30 buy here-pay here vehicles a month through a finance company set up especailly for that purpose. Mr. Reynolds is managing partner of one of the largest Ford dealerships in the country and owner of a Lincoln Mercury dealership and a Mazda dealership.

Note lots are growing at a time when the used-car business is contracting. Fifteen years ago, there were about 120,000 independent used-car dealers in the United States, Mr. Linn said. With the growth of used-car lots at new-car dealerships and the success of big-box retailers such as CarMax, the number of independents has dropped to 54,000 nationally, he said.

"There is a very real need for this business," said Larry Lange, president of PAACO, which has note lots in six Texas cities. "Fifty-five to 60 percent of our society has some blip on their credit that makes it difficult to get a car."

Some industry experts believe the growth will be good for the segment because it increases competition.

"These people serve an economic function – that's the bottom line," said George Hoffer, an economist with Virginia Commonwealth University who follows the auto industry. "If there are supra profits in the segment, you will get competition, and the supra [interest] rates will come down."

Consumer groups maintain that note lots demand too much for their vehicles, charge too much interest and are too quick to repossess vehicles if the weekly payments are late.

Interest rates are high because the risk is great, Mr. Linn said. But the association urges dealers to try to work with customers before they repossess a vehicle – if for no other reason than it generally costs less.

"We know that there are thieves in this business, but you've also got those out there who will do everything they can to keep a customer in their car," he said.

Mr. Milligan, the NIADA's Dealer of the Year, said he is always willing to work with a customer – and opened a computer file to prove his point. The lengthy file was on a customer who owed about $10,000 on a vehicle, including interest, and was supposed to make weekly payments of about $75.

The customer was frequently late with her payments, according to the file, and at one point made none for four months straight. But Mr. Milligan said his company continued to work with the customer. She ultimately paid off the loan – and has since bought six more cars.

"I think that any account that is saved is a great account," said Mr. Milligan, who serves on the board of a local chamber of commerce and is chairman of the chamber's economic development committee.

Mr. Milligan and his wife, Theresa, got into the business 20 years ago. They struggled for several years but now sell about 100 cars a month, most of them costing between $2,995 and $6,995.

"When I started 20 years ago, you never saw a repossession," said Mr. Milligan, 45. "Now, it's almost socially acceptable."

The key to avoiding repossessions is to keep the cars running, he said, and PBR provides service.

"If it's not running, they're not paying," he said. "Almost all of your customers – I would say 80 percent – want you to fix the car for free. Then they will ask you to finance the repairs. We had one ask to finance windshield-wiper blades – $15."

Though the business has been more difficult than he and his wife had anticipated, their company has sold more than 15,000 cars since the mid-1980s.

"We're not all nasty ogres waiting to repossess your car," Mr. Milligan said. "The real truth is we take huge risks every day. Our industry forces the Bank of America to be more competitive, to take a lower Beacon [credit-rating] score. They know we'll be happy to take any business they turn down."

E-mail tbox@dallasnews.com