--- title: "BHPH charge offs in 2026: what normal actually looks like" url: https://lendriskanalytics.com/insights/bhph-normal.html publisher: LendRisk Analytics kind: Sector note description: "A 20 percent annual charge off rate is normal for a properly priced BHPH book. The operators going under are the ones whose recovery model assumed 2021 vehicle prices." html: https://lendriskanalytics.com/insights/bhph-normal.html --- # BHPH charge offs in 2026: what normal actually looks like [← All insights](https://lendriskanalytics.com/articles.html) Vol · 02 Sector note · 4 min read Sector note · BHPH # BHPH charge offs in 2026: what normal actually looks like. A 15 to 25 percent annual charge off rate sounds catastrophic. For a traditional prime or near prime auto lender, it is. For a buy here pay here operation with a properly constructed pricing model, it is normal and expected. The operators going under right now are not the ones with high losses. They are the ones whose recovery model was calibrated to a vehicle market that no longer exists. The buy here pay here model is structurally different from indirect subprime lending. The dealer is the lender. The lender is the dealer. Credit losses are not a surprise. They are priced directly into the interest rate charged, the required down payment, and the collateral haircut applied at origination. A BHPH operator running a 20 percent annualised charge off rate is not in distress. That number is baked into the business model. The business does not fail because it charges off. It fails when one of two things happens. Either the actual charge off rate drifts meaningfully above what the pricing model assumed, or the recovery rate on repossessions falls below what the loss reserve was built to absorb. In 2026, the second of those is the dominant failure mode, and it is not a credit problem. It is a collateral problem. ## Vehicle prices broke the recovery model. BHPH operators work with a specific slice of the used vehicle market. Older, higher mileage units in the 8,000 to 15,000 dollar range. This slice has declined proportionally more than the late model used vehicle market tracked by Manheim. The reason is structural. Late model used inventory rebuilt quickly after the chip shortage cycle ended. Older inventory did not. The depreciation curve that was suppressed in 2021 and 2022 caught up all at once. A repossession that would have cleared 7,500 dollars at auction in 2022 is clearing 5,500 to 6,000 dollars in 2026. After repossession costs, transportation, auction fees, and basic reconditioning, the net recovery on that loan dropped from around 5,500 dollars to closer to 3,500. That difference comes directly out of the recovery rate assumption, which flows directly into net loss. **The number that matters is not your charge off rate. It is your loss given default.** Loss given default equals one minus your recovery rate. If your model assumed 50 percent recovery and you are now running 35 percent, your loss given default went from 50 percent to 65 percent. On a 20 percent charge off rate, that is the difference between a 10 percent net loss and a 13 percent net loss. The book that priced for 10 stops penciling at 13. ## Why this is invisible to most operators. Most BHPH operators track aggregate charge off rate and aggregate cash collections. Those two numbers are insufficient. They tell you about the level of losses. They do not tell you about loss severity, which is the metric driving the actual deterioration. To see what is happening you need to track repossession recovery rate separately, by vintage quarter, and compare it against your underwriting assumption. The operators who have built durable books through this cycle have one thing in common. They track recovery rate as a first class metric, by origination quarter, every month. When recovery rates compressed in early 2025 they saw it in their own data, repriced new originations to a higher down payment requirement, and tightened collateral standards on new loans. The operators who did not track it are now seeing the impact in cash flow without having time to reprice the inflowing book. ## What to do about it. Pull every charge off from the last 24 months. Tag each by origination quarter. Calculate the recovery rate, defined as net auction proceeds divided by remaining principal balance at the time of repossession. Plot it by quarter. Compare against the recovery assumption your pricing model used. If your actual recovery rate is more than five percentage points below your underwriting assumption, your pricing model is broken for current originations. Either raise down payment requirements, shorten loan terms, or tighten the vehicle class you finance. The book you are writing today should reflect the recovery environment of today, not 2022. Method note Calibrate your portfolio against current benchmarks [Read the method note →](https://lendriskanalytics.com/tool.html) The BHPH model is uniquely resilient because the operator controls both sides of the transaction. That resilience only holds if the pricing model stays calibrated to the current environment. The cycle change is the moment that calibration matters most, and the moment most operators miss it. LR LendRisk Analytics Independent market research Continue reading [Vol · 04 · Teardown What the *Tricolor* collapse actually says about deep subprime auto](https://lendriskanalytics.com/insights/tricolor.html) [Vol · 03 · Methodology Roll rate analysis: how delinquency migration *actually* works](https://lendriskanalytics.com/insights/roll-rates.html)