The vast majority of automobiles sold in the United States are sold on time payment plans - these are part of the sales contracts. The purchaser does not pay cash. In most cases he trades in his present car as a down payment and the balance is financed over a period of months, sometimes as long as four years or even longer. The alterna-tive method of payment is, of course, cash, and early in the history of the auto-mobile industry cars were sold only for cash. The trouble with a cash payment requirement for a car is that few people can pay out $4,000 all at once. The question immediately arises as to why a person does not save up his $4,000 first and then when he has accumulated it buy his car, and not until then. The theory is good, but in practice most people cannot accumulate such a sum. Other things come along to attract buyers and they yield to the desire of the moment with the result that away go their savings.

When a person is required by their choice of sales contracts to pay (and this payment really amounts to saving) he generally pays. The alternative is the loss of his car and all of the savings that went into the car. The theory behind time sales is, in addition to the part described above, "Pay as you use the car." Your time pay-ments roughly cover how much of the car's value disappears over a period of months and years. Of course the payments must exceed this depreciation in value or else in the event the buyer does not make his payments and defaults to the finance company or bank, the value left on the car, which the finance com-pany seizes, is less than the amount owed by the purchaser, and therefore the finance company loses.

Besides automobiles, most of which are sold on the time payment plan sales contracts, almost all mobile homes (house trailers) are sold on the same plan. In the past five years more and more pleasure boats have been sold in this way, and all sorts of appli-ances are sold on the same plan: washing machines, driers, air conditioners, vacuum cleaners and television sets. Each year more items are added to the time payment plan group. One of the more recent is air travel. This service is most certainly the exception to the rule that you pay as you use it. When air travel is used up it is really used up and you, the purchaser, have to pay for some-thing that has long since disappeared.

There is really little difference between conditional sales contracts and chattel mortgages as far as the purpose of these legal instruments is concerned. They are both designed to provide security to the investor to enforce his demands for payments (and the payments are made in strict accordance with the contract entered into freely by the purchaser) and to enable the investor to take over the auto or other object financed in case the buyer defaults on his payments. Conditional sales contracts are just what they says they are: a contract of sale which is dependent on the fulfilling of certain conditions on the part of the buyer, namely that he complete all of his payments, whereupon the title to the auto or other object financed passes to him. It does not pass to him until this time. The in-vestor owns the auto, and if he owns it, it is not a very difficult legal procedure for him to take away from the purchaser that which belongs not to the purchaser, but to him.

The chattel mortgage is an obligation on the part of the purchaser to pay the investor. If the purchaser does not meet his payments, the investor must go through the approximate same legal proceedings as in the cases of mortgages on real property, which procedure has already been discussed in connection with mortgages. In practice the job of repossessing is much easier in the case of chattel mortgages than in the case of real property mortgages.

Whether conditional sales contracts are used or chattel mortgages depends on the state in which the purchaser resides when he makes the purchase. In most sales on the time payment plan the state in which the person resides is the same as the state in which the sale is made. Most stationery stores have a conditional sales contract form or chattel mortgage form which is legal in the particular state. In addition any automobile dealer or mobile home dealer or appliance dealer will supply a suitable form, as they have many pads of these. Usually, however, the dealer's form is that of a particular finance company, such as Commercial Credit Corporation or Michigan National Bank or some other company, and these names must be crossed out and your own inserted. It is best to have each one of these changes initialed by the purchaser, and the investor should initial them too. Any dealer or any bank with a time sales department can help you to make out this form correctly.

There are two essentials of sound conditional sales contracts as an investment: down payment and time payments. The down payment must be large enough so that (1) the buyer will think twice before letting his car, or whatever it is, go, and (2) you can easily sell the object quickly for cash, in the event of re-possession, with the result that this cash plus the down payment and what pay-ments you have already received will amply return the total investment. A third essential might be added, and that is that the thing you are financing and the pur-chaser should be located easily in case the purchaser defaults. On a new Cadillac convertible, which is one of the most salable items that can be financed, you might get a down payment of 50% of the price, but when the first payment came due you might find that the car and the purchaser were in South America. The mobility of anything financed is a drawback to its desirability as an investment.

The secret of the return on conditional sales contracts lies in what is called the add-on. If a car is sold for $1,300 and the down payment is $300, obviously the unpaid balance is $1,000. Let us say the purchaser wants to spread this re-mainder over one year (12 months). An example of an interest rate, and a reasonable one, is 6%. Six per cent on $1,000 for one year is $60. The add-on rate is 6% and the add-on is $60. As the designation implies it is added on to the $1,000, and the total is $1,060. This is the note. It is the total amount the buyer owes, and he pays this over a 12 month period. The monthly payments are, of course, determined by dividing $1,060 by 12. The monthly payment works out to be $88.33.

Six per cent does not seem like much of a return until we determine just what the amount of capital is. It is not $1,000 because, when the first payment is made, a part of the capital is returned, and capital is returned every month until the twelfth payment is made. The capital outstanding at the beginning of the period is $1,000 and at the end zero, just as in the case of the mortgages described earlier. The average capital invested is halfway between $1,000 and zero, and this halfway point is $500. A $60 return on $500 is not 6% but approximately 12% ($60 divided by $500). The 12% is not mathematically quite precise, but it is close enough for our purposes.

Perhaps the rate can best be explained by a simple example. In 1954 I went into the business of financing mobile homes (house trailers). I traveled about the country by car trying to find out whether mobile homes and mobile home buyers were good risks, whether finance was needed in this industry and on what terms. The prevailing terms were one-third down and the balance due over three years with a 6% add-on. But mobile homes had increased in size drastically from a camping vehicle that was pulled behind the car, to a real home with two or even three bedrooms, usually one bath and at least 42 feet in length for the larger models. It was rarely pulled behind the owner's car but was moved pro-fessionally by a tow truck and stayed in the same location for a year or more. It was a home, not a trailer. The used trailer market had never been glutted and the values remained high over a period of years.

Under these conditions it was felt that 25% down was ample and the balance could be financed over five years instead of three. The add-on rate could reflect the growing importance of the mobile home as a home and could be reduced to 5% from 6%.

The response of mobile home dealers and buyers to these sales contracts plans was immediate. Business soon came in at the rate of nearly $1,000,000 per month and almost all the credits proved sound. My job became one of running around after banks and finance companies and trying to supply the money that was required in ever-greater quantities. Almost every contract and every dealer worked out well, and losses were at a minimum. There was one rotten apple in the lot and his activi-ties will be described later since they were so flagrantly dishonest as to be almost unbelievable. He can be used as a lesson in what to avoid and how to avoid it.

In 1955, after the 25% down, five year 5% plan was working well, I noticed a sign on a used car sitting in a lot in Arlington, Virginia. It said, "$10 down." I stopped and went into the lot to inquire how such low down payment plans could work. What I found out led to the development of a special program for the financing of used mobile homes. Essentially it was a 10% down, five-year plan. Up to that time there had never been a generally offered plan requiring only 10% down and financing for as long as five years. The 10% down was felt to be justified because the "new increment" had been knocked off. If a new car is purchased and driven around for a day or two it is no longer new; and even though in that time the owner may have added seat covers, a radio and premium tires, let us say, the car is used and cannot bring the full new car price. The "new increment" has been knocked off. In used cars or trailers there is no new incre-ment, which disappears as soon as delivery has been made, no new increment, which has to be taken care of by a large down payment.

The 10% down, five year used mobile home plan was put into effect, but the more liberal terms had to be compensated for by an increase in rate. The rate established was 8%, and to find the real rate it is necessary to double this rate. It is 16% or a little less. Three new finance companies were organized on the basis of this plan alone. Each has purchased millions of dollars' worth of this paper and each is very successful.

In the case of used mobile homes there are further protections in sales contracts. The dealer guarantees the paper. If the customer does not pay, the dealer must pay the finance company or investor himself the entire balance owed. This provision is called full recourse, and there are few mobile homes financed without this re-course. In addition, if the amount financed (the unpaid balance in the above illustration) is $1,000, the check paid to the dealer is not $1,000 but only $950. There is a 5% "reserve" or "holdback" which is paid the dealer only after the last payment has been made on the mobile home by the customer. If the buyer defaults and the investor has to sell the mobile home quickly he will realize only $900, let us say. The dealer then loses his $50. This reserve acts as a spur to the dealer to seek out good customers and to do everything within his power to see that they pay. This reserve is also used in the case of pre-cut homes, and if it is general practice you, as the investor, should get it too.

This is an illustration of how to get a good investment at a high rate: Offer something that is not generally offered. The rate on the used mobile homes was 8% and the inducement to pay this higher rate was the longer term and the lower down payment. Let us see how it works in practice.

Under the old finance plan of one-third down and a term of three years at 6% on a $3,000 mobile home, the down payment is $1,000 as against $300 on the mobile home under the 10% down plan.

The add-on under the old plan at 6% for three years is 18% of the unpaid bal-ance after the $1,000 down payment¡ª$2,000¡ªand this add-on amounts to $360. The total note is $2,000 plus $360-$2,360. If this note is divided over 36 months the monthly payment works out to $65.55.

Under the new plan, after the $300 down payment is deducted from the price of $3,000, the unpaid balance of $2,700 must have the higher rate of 8% per annum applied to it for five years¡ª40% in all. This 40% amounts in dollars to $1,080, and if we add this to the $2,700 unpaid balance we get a total note of $3,780. But this note is divided by five years (60 months) instead of three years under the old plan, and the monthly payment is $63. It is lower than the $65.55 under the old plan even with one-third paid down under the old plan.

In order to get sound credits you can offer a plan just a little better than the prevailing plan: 2?% holdback instead of 5%, or 20% down instead of 25%, four years instead of three.

In time sales finance, whether on homes, cars or refrigerators, the size of the monthly payment is the most important thing to the purchaser, and the ques-tion to answer is, "Does he have the ability to meet this monthly payment?" If he can meet it, if the down payment is adequate to provide security to the in-vestor in case the buyer defaults and if the payments are made faster than the thing financed depreciates in value, the deal is sound, provided of course there is some assurance the purchaser does not flee the state or country so that you can never collect.

This last condition is a real obstacle to the investment in certain things¡ªauto-mobiles, for instance. In general automobiles are not for the private investor. I have sold some on the time payment plan to secure a good return, but I sold to reputable people who lived and worked a long time in my city, and even in these cases I once had to take back the car and resell it. I have financed mobile homes personally where the customer lived 1,200 miles from me. I had a dealer sell mobile homes for me, but when the dealer had a choice of whether to sell my Merchandise or his own, he took the good customers and gave me the poor ones.

The pre-cut or shell homes described in the earlier chapter have been sold on the conditional sales contracts plan instead of on the first mortgage plan. These can be good investments in either case if rigid credit rules are adhered to and if the dealer checks out as a good and substantial operator and is recourse on the pre-cut homes.

Mobile home paper was once the best in the time sales finance business. Now the investor has to be selective in both the dealer and the individual customer, and the purchaser should not be 1,200 miles away, but in or near the investor's city so that the investor can put on collection effort quickly and easily and can repossess with a minimum of trouble.

Boat paper is still good, but competition among banks and finance companies has the effect of taking on lower and lower grade credits. Very often boats are sold without recourse on the boat dealer, so that the selection of good credits is all-important.

Appliances are not recommended for the individual investor. Appliance deal-ers and customers offer too great a problem for him.

In almost every city there are dealers from whom all kinds of paper can be bought, and these are located through looking at newspaper advertisements and in the classified telephone directory. It is well to talk with your local banker, especially the banker who handles time sales business, about credits, about forms to use and about the details of closing the deals. A large bank sometimes invests in over 100 deals every day. They are thus experts and can be of immense help. It is wise to have the bank collect the payments for you, as in the case of property mortgages. The customers respect the bank more than an individual and do not like to default when a bank knows about it.

In summary, then, these are the things on which to concentrate in purchasing conditional sales contracts and chattel mortgages:

1. Finance a necessity, something that the buyer does not want to lose, rather than a frivolity¡ªa mobile home, rather than a second car.



2. Secure an adequate down payment to reduce the amount you have in the object financed to a safe level and to provide an inducement to the purchaser not to let his object go in time of financial stress.



3. Have the term of payment long enough to reduce the monthly payments to a level that the purchaser can meet, and undercut competition a little if necessary, but have the payoff faster than the thing financed goes down in value.*
   
   * Every auto dealer has a book of used car values on each make and year-the average price, the wholesale price, and the loan value. Every mobile home dealer has a similar book. Consult these to see how fast the item financed goes down in value each year.



4. Have recourse on the dealer if possible, and this is sometimes customary in the industry as, for instance, the mobile home industry. This is a guarantee that if the customer does not pay, the dealer must pay you off. It offers some protection; but remember the dealer has probably guaranteed thousands or even millions of dollars' worth of contracts, and if any substantial number of them defaulted he could not possibly pay off.



5. Limit the advance to die dealer if this is customary in the industry. There is a holdback of 5% which is common usage in mobile homes and 6% in pre-cut or shell homes. You might shave this a little in order to induce the dealer to give you the best credits.



6. Make sure of the financial strength and reputability of the dealer you do business with by inquiries in your city, particularly of banks and other organizations with which he does business. Good dealers usually have good credits and poor dealers poor credits.



7. Finance nearby. Don't make the mistake I once did when I financed mobile homes in Miami, 1,200 miles from my home in Washington. Problems could never be handled in person, and I could never call on the customer. Collection agencies and lawyers always had to be used. These were costly and did not always move promptly on problems.



8. Examine purchasers periodically to see that they are still there, still employed and still good credits. I once visited a debtor who was paying promptly only to find that he was near bankruptcy.



9. See that you are protected by adequate insurance:

Fire insurance on all homes and cars you finance and anything else that will burn. Examine the policy and make sure it is always in force. You might even include a policy payable to you in the contract and have the purchaser finance it. This is customary in the case of mobile homes.

Comprehensive insurance in the case of cars. Theft insurance on cars and mobile homes.

Skip insurance (conversion, secretion and embezzlement insurance) in the case of mobile homes and maybe cars. This is customary and required on all mobile homes. It costs more on cars and is not always written by insurance companies.

Credit life, health and accident insurance. This pays off the investor in case the customer gets sick or dies. It is written on many shell homes, mobile homes and home improvements as a part of the financing.

American Plan Corporation of New York and St. Louis Fire and Marine Insur-ance Company in St. Louis, Mo., write most of the above types of insurance.

In mobile homes and what few automobiles we financed, almost all our insur-ance was placed with the Amrican Plan Corporation, 99 Park Avenue, New York City. They can advise you on what local agents handle what insurance you need.

Everything that is done in connection with investing in conditional sales contracts and chattel mortgages must be done strictly in accordance with the letter of the law, or on default you will find the buyer is quick enough to inform you that because you did not comply with legal niceties he really does not owe you anything.

On all mobile homes and automobiles sold you must have a title from the motor vehicle bureau of the state in title states, and you must have this in your possession within two weeks of the sale to the customer. This gives the dealer ample time to secure the title for you. In many states you must record the mortgage or lien in the courthouse in the county seat. A lawyer will tell you whether you have to do this or not and will handle the filing for you at a small fee. All spaces in the contract must be filled in properly and the contract signed correctly. In many cases the wife's signature should be secured so that she too is liable. A lawyer should check the completion of these forms for you. The bank will help, and you can assign these contracts to the bank to collect. It costs only a little and saves you much trouble.

In the chapter on judging credits the procedures to use in getting a delinquent debtor to pay up will be discussed. In that chapter the ultimate procedure will be briefly described¡ªwhen you cannot possibly get the debtor to pay up. While the exact process varies from state to state, in general there are two choices: sue to collect or repossess the car or trailer or whatever it is. If under the various pressures that are put on the debtor he does not pay, the usual and best choice is the repossession of the object purchased. This is the reason for stressing ade-quate down payment and periodic payments large enough to more than cover the depreciation in value of the item. When you repossess it, it should bring, when sold quickly for cash, enough to pay you off. Strangely enough it is always a struggle in financing to get out of the repossessed item what you have in it, and a finance company rarely, if ever, wants an article to become overdue so that it can repossess it and sell it at a profit. Things don't work that way.

The job of repossession is a strictly legal one. If the person in default hires a lawyer he may require you to go into court and wait months before you can take over the thing financed. Usually he does not take this action, but reposses-sion is not a pleasant job. For that reason it is best to secure the services of a professional repossessor. Over a period of years my wife and I financed through banks and finance companies several thousand mobile homes. In cases of skip or delinquency we used only two skip and collection services, no matter where each skip was¡ªin Virginia or New Mexico: Summs Skip and Collection Service, Bankers Trust Building, Norfolk 10, Virginia, and B. C. Snow Adjusters, 1833 Kuehler Avenue, New Braunfels, Texas.

Sometimes the collection service would get the sheriff and have him go along on the repossession. Sometimes the repossessor notifies the police that he is going to take back a car and is not stealing it, and this is sufficient. Repossession is nothing new and nothing to condemn, and almost all police departments and courts realize this fact. If, however, you have any compunction about repossess-ing anything, then don't finance it. Invest in something else.

The credit and collection service will usually sell the thing for you and remit the proceeds to you. In many cities there are credit and collection services that charge a disproportionately high fee for the service, and it is well to have the fee understood in advance. Some take one-fourth, one-third or even one-half the proceeds. The two collection services listed above rarely took over $100 on a mobile home worth several thousands of dollars, and the service was prompt and effective.

There is an excellent illustration of the precautions which any financial in-stitution or individual must take when going into the financing of conditional sales contracts or chattel mortgages. In 1955 I had set up one of the most ambitious finance plans I had ever undertaken¡ªa retail finance plan for mobile homes for the Chase Manhattan Bank. I was to write all of the insurance and secure a commission in addition. Since this bank's plans are never small it looked like a very profitable undertaking, and the bank talked in a general way about eventu-ally putting a sum in the neighborhood of $50,000,000 into the mobile home paper.

Very elaborate plans were made for the bank's entry into the field. I con-ducted a survey to determine about how much business there would be if the bank's plan were put into effect. The survey covered several thousand dealers all over the country. The essence of what the bank offered that was new was 25% down and five years to pay, whereas up to that time one-third down and three years was the general rule, and more liberal terms were the exception. The rate charged the customer was to be 5%, whereas the generally prevailing rate was 6%. Finally if the dealer chose to charge 6% he would get the extra percent as a commission. Whereas used mobile homes had usually been financed at 8% interest the Chase plan was to charge 6% on the majority of used homes.

The Vice President of Chase in charge of retail finance, Philip Smith, rightly anticipated a tremendous volume of business under the new plan, and rate charts, conditional sales contracts and credit applications had been carefully prepared over a period of many months. A great increase in the work load of the bank was anticipated, and this increase had been planned for.

The thing that worried Phil Smith the most, however, seemed to be the first deals (conditional sales contracts) he would receive from a particular dealer. I recall questioning him about this fear and he stated to me, "We went after the business. We wanted the finance. Now every dealer is going to 'test' me. He is going to think that because our bank wants the business he can send us poor credits¡ªcredits that he knows no other bank that is financing him will take.

Now the question is how I can refuse to be a 'patsy¡¯on these first deals and still not lose the dealer forever."

The individual investor in retail contracts is in this position, only in a worse one. He goes to the dealer and says he wants to buy some conditional sales con-tracts. The dealer immediately thinks of all the contracts the bank has turned down that he felt were perfectly good. No doubt he will have a few of these handy and will explain in detail to the investor just how good they really are, how sound the buyer is, how long he has been in his present job, how well he knows his wife and three children, etc., etc.

Or the dealer may take a different tack with the individual investor. He may say nothing and just send him the turn down contracts as if this were normal business. The individual investor is in a worse position than the bank because he doesn't have the financial power of the bank. If a bank takes on a dealer to finance it is likely that the bank will put hundreds of thousands of dollars into the contracts of just the one dealer, and that it will keep buying these sales contracts for years. The dealer will probably feel that any one investor at best will buy only a few contracts and then stop. Why, then, should he give good contracts to the investor?

There are three answers to this dilemma from the point of view of the investor:

1. Do business only with the soundest dealers, and rely on your credit check and inquiries of other businessmen in the area to determine who is the soundest.



2. Give the dealer a little something that the banks don't. All of my own finance plans were based on giving the dealer something that he didn't already have. Stretch the term a little¡ªperhaps by six months. Cut the dealer's reserve by one per cent Lower the interest rate by one per cent. And stress the fact that you are doing this to get superior credits and that you will accept only these.



3. Be sure the dealer is recourse, and have him sign as recourse on the contract. Thus if the customer does not pay he must. We had such a superior plan with the Chase Manhattan Bank, and it is in-teresting to see what happened to the plan. When a bank the size of Chase establishes new terms it is very likely that other banks will have to follow suit or else drop out of the business in the areas in which Chase operates. The first thing that happened was a visit to Chase by the president of a large bank financing mobile homes. It was his sincere feeling that Chase should get out of the mobile home business and certainly out of the areas in which his bank operated.

The Chase officials listened politely and then bid the bank president goodbye.

This was not the end of the story, however. From all over the country bankers began calling in to Chase to complain about the "invasion of their territories" by the Chase bank, and especially with such liberal terms.

The "rumble from all over the country" eventually proved too much and Chase backed out of the retail mobile home finance business.

As far as the other banks were concerned, however, time sales finance had moved on. The very fact that Chase had publicized their mobile home plan with a lower down payment, a longer term and at less interest cost changed the terms of mobile home finance all over the country¡ªand permanently¡ªfor the benefit of the ultimate customer¡ªthe buyer of a mobile home.

Bellow you will find samples of typical forms used in retail finance:

Conditional Sales Contracts, sample used in Pennsylvania.
Credit Application, used for mobile homes.
Chattel Mortgage, sample used in Ohio.
Conditional Sales Contracts, sample used in several states.