Back when I served as an F&I Manager, I had a line I would use when selling Service Contracts, “Cars are made in Detroit not in Heaven. They are going to break.” The fact that cars break is still true today. After all these years we have still not made the perfect car that never breaks.
In the Buy Here Pay Here business those mechanical breakdowns can result in customers no longer making payments. More than likely because the customer cannot afford the repair.
Result…Repossession.
The solution is not new, it is still a Vehicle Service Contract. However, this creates another problem, which is not new either…Cash Flow. Buying a Vehicle Service Contract from a warranty company kills cash flow. If a Vehicle Service Contract costs you $1000, if you sell 10, you have put out $10,000 on behalf of your customers. It doesn’t take long to crush your lending pool.
However, if your customer had a Vehicle Service Contract, that would solve a multitude of issues. 1. They would have a concise list of what repairs will be paid for and those that won’t. 2. When the customer starts to experience issues with their vehicle, they are more likely to come have it looked at, many times avoiding bigger problems. 3. A deductible will often slow “that” customer (the one who shows up almost daily with an issue) from wanting you to rebuild their vehicle…one part at a time. 4. The customer is more likely to come back to you for repairs. 5. With a working vehicle, the customer is also more likely to continue making their payments. 6. Chances are, you will not have to repossess their vehicle because they can’t pay to repair it. In other words, you can Stop Punishing Them because their car broke down.
Okay, so we have established that selling them a Vehicle Service Contract would be an all-around good thing…if it didn’t kill the lending pool.
Have you heard about Reinsurance? It is a means by which you can own your own warranty company. Well, you don’t sell other people’s cars…why are you selling other people’s warranties?
There are many wonderful benefits to owning your own warranty company. The first I would like to touch on is that with a reinsurance company, you can choose to be billed on a monthly basis. So, as the customer makes their payment each month, you take that portion related to the warranty out of the payment and forward it to your warranty company.
Completely pass through. ZERO hit on cash flow.
And who is paying to keep your fleet on the road? Your customers.
If that was all a reinsurance company did for the Buy Here Pay Here dealer, it would be life changing, but that’s not all.
Remember, I said you will own the warranty company. If you own it, you also profit from it.
Let me explain:
Third Party Warranty Co. Your Own Warranty Co.
Sell to Customer $1399 $1399
Cost to dealership $1000 $1000
Dealership Profit $399 $399 Same!
Remitted Premium $1000 $1000
Overhead $200 $200
Net Premium $800 $800 Same!
Claims average $300 $300
Your Underwriting Profit: ZERO $500 Big Difference!!
Multiply that 10 or 100 or 1000 or more. That’s HUGE!!
But wait there’s more…
Uncle Sam says that as long as you don’t exceed $2,450,000 per YEAR in net written premium, you can elect to only be taxed on the investment income. That’s the interest earned on that $2.45K, not the $2.45K itself.
You will be pleased to know that there are many other products to make owning a Buy Here Pay Here dealership a much more pleasurable and profitable venture. They include, but are not limited to, Collateral Protection Insurance (CPI), Guaranteed Asset Protection (GAP), Debt Cancellation Coverage (DCC), Loss Damage Waiver (LDW), Limited Warranties, Certified Warranties, Vehicle Service Contracts and many Ancillary products.
It’s important in this business to do things the right way. In the December 2021 BHPH Dealer magazine, I submitted an article on what to lookout for when owning a reinsurance company. The article is titled “Are You Audit Ready?”
Charles Spurgeon wrote, “Discernment is not knowing the difference between Right and Wrong. It is knowing the difference between Right and Almost Right.” There are a whole host of alphabet agencies out there to correct the almost right.
If you stay Right you ain’t got to get Right!!
There are many, many benefits to owning a reinsurance company. The Number #1 Regret… “I should have done this years ago”.
God Bless You,
Tim Byrd
