The Lease Here Pay Here (LHPH) Strategy

By Anjelica Baker - September 10, 2020

During these times of economic uncertainty due to the global pandemic, Lease-Here Pay-Here (LHPH) is an excellent alternative to the traditional vehicle ownership model. Most consumers are hesitant to purchase a new vehicle as unemployment has been on the rise recently.  A simple alternative to meet the transportation needs of consumers is a short-term lease.

Making the switch from selling retail vehicles to creating an in-house leasing program is a big decision for an independent auto dealer.  The first question every dealer researching LHPH asks is, “can I make more money with LHPH?”  The answer to that question is yes.

There are numerous new profit opportunities that come with the implementation of a LHPH program. With a LHPH deal, the dealer leases the vehicle to the consumer and then services that lease through its term.  The LHPH dealer makes the same profit as a Buy-Here Pay-Here (BHPH) dealer from the original mark up on the car and earns a rent factor on each payment equivalent to a similar interest rate on the BHPH note. However, when the lease matures, the dealer still retains the vehicle and can re-lease the same vehicle again, or sell it, without purchasing new inventory. By being able to lease the same vehicle more than once the dealer can make additional profit by collecting a new stream of payments from the same asset.

The unforeseen economic crisis has shined a light on an additional benefit of having your own LHPH program:  Recycling of Inventory.  We often promote recycling of maturing leases from your portfolio as a significant advantage of LHPH from a profitability perspective, and it is.  However, the additional benefit of having a mature portfolio of leases with numerous lease returns coming back to each month is:  free inventory.

For those dealers who have developed their LHPH program over the last few years, they have several cars coming back onto their lots each month, without having to buy those vehicles on the market.  These cars are debt-free, no flooring or lines of credit debt and fees weighing their operations down.

Another large benefit of an LHPH model is improved cash flow and liquidity through the deferral of sales tax payments. Generally, in a BHPH model, sales tax is remitted for the entire sales price up front. In most states, sales tax related to a lease is only assessed on a per payment collected basis. Additionally, initial customer payments can be collected as non-taxable, refundable security deposits. LHPH owners can benefit from deferred federal and state income taxes by deferring the gross profit realized on a traditional sale and finance transaction.

BHPH transactions typically result in the sale of a vehicle from the dealership at significant gross margin. BHPH operators frequently offset the gross profit by selling the installment contract – at a discount – to a related finance company (RFC). Because LHPH transactions typically do not generate a sales transaction, there is no gain to be recognized. Without the need to sell contracts to the RFC, LHPH models can also eliminate the need for the two-company structure, which simplifies financial reporting. Furthermore, with an LHPH model, vehicles remain the property of the dealership and are often depreciated at 100% in the year of purchase due to tax reform’s enhanced bonus depreciation program. This results in a significant reduction of initial tax liability.

Other additional benefits are better bankruptcy protections and regulations that are somewhat less restrictive.  As a result of the pandemic it is reasonable to expect a rise in consumer bankruptcy filings.  One of the many benefits of the product offered by Lease Here Pay Here dealers is the bankruptcy remote nature of the lease.  Unlike the retail installment sales contract in Buy-Here, Pay-Here, a lease cannot be included in a bankrupt.  The lessee must decide to either “accept” the lease and continue making the agreed upon payments, or “reject” the lease and return the vehicle to the lessor.

In today’s every changing economy, migrating from the traditional BHPH model to the LHPH model continues to make even more sense. By identifying a LHPH compatible Dealer Management System that can accurately calculate a lease deal dealers can switch to a LHPH program.

To learn more about how Lease Here Pay Here strategy can work for your business needs please call Deal Pack Pro Support at 1-800-526-5832.

Inquiries can also be made through our new Chat feature located here: https://dealpack.com/support

 

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