Rural vs Urban BHPH Portfolios: Geographic Performance Differentials Explained

Rural and urban Buy Here Pay Here (BHPH) portfolios perform differently due to factors like transportation access, job markets, and borrower behavior. Here’s a quick breakdown:

• Rural Areas: Borrowers depend heavily on vehicles due to limited public transportation. This often makes car payments a priority, but rural job markets are less stable, leading to payment challenges.
• Urban Areas: Public transit reduces reliance on cars, and diverse job markets provide more income stability. However, urban borrowers show varied payment behaviors due to more financing options.

Quick Comparison

Key takeaway: BHPH dealers need tailored strategies for rural and urban markets, such as adjusting loan terms, collection methods, and leveraging analytics to manage risks effectively.

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Transportation Access and Portfolio Results

Transportation access plays a critical role in shaping BHPH portfolio performance across rural and urban areas. The differences in transit options between these regions influence vehicle dependency and borrowers' repayment behavior.

Car Dependency in Rural Areas

In rural areas, personal vehicles are a necessity. Most residents rely on single-driver vehicles to meet their daily needs.

This reliance is amplified by increasing travel distances. Between 2001 and 2017, the average distance rural residents traveled for medical or dental care grew from 15.16 miles to 17.93 miles.

Here’s how this impacts rural BHPH portfolios:

Public Transit Options in Cities

Urban areas offer a completely different transportation environment. Public transit options are widely available, which influences how urban residents approach vehicle ownership and payments.

"Transportation allows access to food, healthcare, educational opportunities, and employment. It also connects people to recreation, entertainment, and other activities that increase quality of life." - RHIhub Toolkit

The U.S. Department of Transportation's Federal Highway Administration highlights that many rural transportation systems are "inadequate for current travel", further emphasizing the disparity with urban infrastructure.

Urban areas stand out in the following ways:

• Access to public transit reduces reliance on personal vehicles, which can influence payment priorities.
• A diverse transportation network offers more commuting options, adding flexibility for residents.

These regional transportation differences create distinct risk profiles for BHPH portfolios. In rural areas, borrowers' dependence on vehicles can be a positive for repayment consistency, but longer travel distances and infrastructure challenges add complexity. Urban portfolios, on the other hand, are shaped by reduced vehicle reliance and a broad range of transit options.

Next, we’ll explore how these transportation dynamics intersect with job market behaviors.

Job Markets and Income Stability

Employment and income stability vary significantly between rural and urban areas, influencing BHPH risk profiles and borrower payment behaviors.

Rural Work and Income Cycles

Rural job markets directly affect loan performance. From 2007 to 2010, nonmetropolitan areas lost 1.4 million jobs. By 2019, rural employment had only reached 97% of pre–Great Recession levels, reflecting a slower recovery.

Here’s how rural employment metrics shifted between 2007 and 2019:

The COVID-19 pandemic worsened the situation, reducing rural employment to just 92% of 2007 levels. This adds pressure to borrower payment reliability in these areas.

Urban Employment Diversity

Urban areas, in contrast, showed stronger recovery after COVID-19, with employment growing by 7.4% between 2020 and 2022.

Urban job markets offer several advantages for BHPH portfolios:

From 2007 to 2019, the gap in prime-age unemployment rates between racial and ethnic groups narrowed in urban areas but widened in rural ones. This suggests urban borrowers tend to have more stable income opportunities across various demographics.

These employment trends shape BHPH portfolio strategies. Urban portfolios benefit from faster recovery and diverse job markets, while rural portfolios face slower growth and higher employment volatility. These differences also influence local payment patterns and borrower behaviors in BHPH networks.

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Local Networks and Payment Patterns

The dynamics of local communities and financial networks play a big role in how BHPH portfolios perform. In close-knit communities, strong ties and active involvement often lead to more reliable repayment habits. Dealers who engage in local events and build relationships with nearby businesses and employers can see better customer loyalty and more consistent collections.

In urban areas, borrowers often have access to a wider range of financing and income opportunities, leading to more varied payment behaviors. To address these complexities, BHPH dealers in cities often use digital payment systems and flexible scheduling, which can help maintain portfolio stability. These differences in borrower behavior call for tailored approaches.

Dealers need market-specific strategies to succeed. Adjusting payment schedules, collection methods, and communication styles can make a big difference in improving portfolio performance. By understanding these regional patterns, dealers can fine-tune their collection processes and achieve stronger results across diverse markets.

Performance Data: Rural vs Urban Results

Regional differences in transportation and employment trends directly affect portfolio performance. Metrics reveal how geography impacts returns.

Payment Success Rates

Payment trends differ between rural and urban Buy Here Pay Here (BHPH) portfolios. Rural borrowers, despite having higher net worth in most income brackets (except those earning above $100,000), face a 9 basis point higher debt cost. This is largely due to limited access to financial institutions. These cost disparities influence both asset composition and collection outcomes.

Collection Results and Returns

The types of assets borrowers hold significantly affect portfolio results. Rural borrowers allocate 33.1% of their assets to businesses, while urban borrowers allocate 22.3%. Here's a closer look at the differences:

Rural portfolios gain from stronger relationship-driven banking practices, whereas urban portfolios benefit from a more varied asset mix, including higher shares of retirement accounts and mutual funds. For dealers, this means adjusting strategies: rural portfolios thrive with personalized relationship management, while urban portfolios can rely on standardized processes due to their larger scale and borrower diversity.

These insights highlight the need for tailored risk management and collection strategies to address the unique challenges and opportunities in rural and urban markets.

Risk Management Methods

Location Mix Planning

With 80% of Americans living in urban areas and 13.8% in rural regions, it's crucial to balance portfolios for both returns and risk management. Rural borrowers often hold a higher concentration of business assets, requiring closer monitoring compared to the more varied asset mix commonly seen in urban markets.

Location-Based Loan Standards

Loan standards should align with the unique characteristics of rural and urban markets. Here's a breakdown:

These tailored standards require robust, data-driven strategies to be effective.

Data Analysis Applications

Advanced analytics play a key role in optimizing portfolios. Surveys highlight that analytics drive decision-making (64%), aid in fraud detection (59%), reduce errors (56%), and uncover growth opportunities (54%).

"Early detection of high-risk loans through predictive analytics enables proactive measures to mitigate potential losses." - defiSOLUTIONS.com

Analytics should focus on these key areas:

• Market Performance Tracking
  Use integrated loan software to monitor performance and refine underwriting practices.
• Customer Segmentation
  Study borrower patterns to create location-specific risk profiles, ensuring accurate pricing and terms.
• Fraud Prevention
  Leverage analytics to detect unusual patterns across different regions.

Conclusion

Urban and rural demographics differ significantly, leading to distinct patterns in portfolio performance that call for tailored management strategies. Rural portfolios tend to rely more on business assets and vehicles, while urban portfolios are marked by more diverse assets and higher median values. These contrasts highlight the importance of strategies designed for specific markets.

"The more you learn, the more you will earn!" – Ken Shilson, President of Subprime Analytics

Here are some key strategies to consider:

• Use advanced analytics like static pool analysis and default tracking to identify trends.
• Take swift collection actions that account for location-specific factors.
• Assess business models for cash efficiency within each geographic market.

To build strong and profitable BHPH portfolios, it's essential to combine advanced analytics with strategies that cater to the distinct needs of urban and rural markets.

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• Regional BHPH Portfolio Performance: State-by-State Comparative Analysis
• Economic Indicators That Predict BHPH Portfolio Performance by Region
• Regional Employment Trends and Their Correlation to BHPH Portfolio Performance