What Is Special Finance?

The definition of Subprime or Special Finance (SFI) can vary greatly from dealership to dealership. Generally, Special Finance is defined as the ability to obtain credit for customers who are normally unable to finance a vehicle through your conventional or primary lenders. Typically these customers have either a limited credit file or credit issues that make them undesirable to primary lenders. Let's look briefly at the common issues.

Credit Score: Many lenders use credit scores to define Special Finance applicants. Typically, banks regard a score below 620 as sub-prime or Special Finance territory. While this is not a hard and fast rule, it gives us a starting point to work from. Many lenders use other criteria along with the credit score to determine an applicant's credit worthiness. A recent repossession or bankruptcy, or a rash of late payments in recent months may render a high credit score moot, as well as a limited credit bureau containing all brand new accounts with low limits.

Repossessions: Vehicles that for one reason or another were returned to the lender.

Voluntary repossessions are those that the customer returned the vehicle to the lender in order to avoid having to pay any recovery fees.

Involuntary repossessions indicate the lender had to send somebody out to physically find the vehicle.

Bankruptcies: Federal filings that allow a consumer to get judicial relief from his debts. Recent changes in bankruptcy law have made it more difficult to file.

Most debtors fall into Chapter 13, also know as a Wage Earner's Plan (WEP). The debtor gives his money to a trustee, who allows him to keep a small portion to live on. The balance goes to his creditors to pay down his accounts. Typically, the court requires 3-5 years of payments before "discharging" the debtor from the balance of his debts and allowing him to start over.

"Chapter 7" bankruptcies allow the court to grant the debtor immediate relief from his debts. The court effectively wipes out all of the debtors balances and gives a fresh start. New laws require the courts to consider income and ability to repay some of the debt before granting either motion.

Charge Offs: Accounts that the lender has occur at the point in the life of a debt where the lender has given up trying to collect the debt, and has written it off. Generally, these charged off accounts end up as collections. A creditor will sell his charged off accounts to a collection agency for pennies on the dollar, so any monies the collection agency gets from the debtor is found money.

Late Payments: The credit bureaus rate accounts as paid on time, 30, 60 or 90 days late. Obviously, 90 days late is significantly worse than 30 days, and more often than not leads to the dreaded charged off account.

First Time Buyers (FTB): These are typically applicants who have a thin credit file or no credit history at all. Many times these are young, newly employed college graduates who may qualify under a captive lender's program. In many cases, these customers may be recent immigrants to the U.S., who may or may not have had credit in their native homeland. Some may have a Taxpayers ID Number (TIN) or W-7, instead of a Social Security Number. Whether or not these applicants fall into Special Finance is a matter of debate in many dealerships, and we will address this issue a bit later.

Time in Bureau: A limited credit file, having only a few minor accounts opened for a short time. While these credit bureaus may show a relatively high score, the quality of the accounts (local department stores or merchants, secured credit cards, accounts with minimal credit limits) makes it difficult for a lender to asses the character of the applicant. Usually these credit files have a few accounts opened for a short period of time with either a limited payment history or none at all.

Tax Liens: The Internal Revenue Service or a state or local taxing authority places a lien on property owned by the debtor. If the debtor owns no real property, a paper lien is filed which allows the taxing authority to attach any property the debtor may acquire.

Public Records: Garnishments, judgments or other matters that become an item of public record due to a court order. Included in here may be records of a bankruptcy or a state or federal tax lien.

Credit Counseling: Often a precursor to filing bankruptcy, credit counseling is a process where a debtor enters into a contract with a credit counselor or agency to arrange partial payment on the outstanding debts. Typically, these accounts are approaching the "critical mass" of becoming a charge-off. The agency has negotiated a repayment plan with the creditor, and each month the debtor pays a sum of money to the agency, which pays the negotiated amount to each creditor. Most of the agencies require the customer to agree not to expand his debt while enrolled in the program, and lenders typically will not consider an applicant who is actively enrolled in credit counseling.

Settled Accounts: These are accounts in which the creditor considers the account closed, but the debtor has paid less than the full amount owed to the credit. The creditor has agreed to accept whatever repayment they were able to collect on the outstanding balance, which was reduced by eliminating a part of the interest owed on the account in order to collect as much of the principle as possible. These accounts are typically viewed by a lender as just short of a charge off, and tend to indicate the applicant's inability to meet their obligations.

So, what business are you in?

These might sound like strange questions and yet they are very important ones to answer. The business you are in can change with every customer you work with!

If properly managed, "sales" in the automobile industry falls into three different businesses:

If working with customers that have "A" credit (Prime), you are in fact selling new and used vehicles.

If working with customers that have "B-D" credit (Special Finance), you are first in the loan origination business.

If working with customers that have "E-Z" credit (Buy Here Pay Here), you are in the collection business.

So which business are you in? Many dealerships make the mistake of believing they are only in business of "selling new and used vehicles". The problem with that is that many of their customers fall in one of the two non-prime categories of credit. If you are working with customers that have less than perfect credit, you must also see yourself in the "loan origination" and/or "collection" business.






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Credit Counseling In Special Finance

One of the most important roles a special finance manager can have is that of "Credit Counselor'. Most of the time, we talk about counseling your "no sales" or turndowns, in an effort to hold on to them and possibly sell them a vehicle later on, after they have "refreshed" their credit. A proactive approach to this concept is taking on the role of credit counselor in order to sell these customers a vehicle now, during the sales presentation. Doing so will help you control the process, keeping the customer focused on the "credit decision" and away from the "product decision" until you are ready to do so. Taking a credit counselor demeanor with these customers will also help set and keep their expectation reasonable.

While bad credit may be obvious to someone who looks at credit reports all day, many times a customer may not realize what their credit issues may be. Credit counseling is an effective way to maintain control of the special finance sales process. If the process is done correctly, an applicant's expectations will be kept at a reasonable level.

So first of all, what exactly is bad credit? Numerous types of credit report problems are considered a sign of bad credit and could cause a lender to reject an application for a loan. Such problems include: missing a credit card payment, defaulting on a prior loan, filing for bankruptcy in the past seven years, or not paying taxes. Other black marks on a credit report include a judgment filed (perhaps for non-payment of spousal or child support) or any collection activity. To many special finance customers, these may be regular occurrences which they do not consider to be bad credit.

The credit counseling process begins with the customer interview. The credit application should be reviewed during the customer interview. Take the time to find out if there are any potential pitfalls. Look for gaps in residence or employment. Find out the particulars regarding the customer's living arrangements. Do they rent or own; is the monthly expense split with anyone else? Is the income correctly stated and is it verifiable. This process starts the conversation in a non-confrontational manner. Not only do you get to know your customer better, but this process gets customers talking freely about themselves.

Once the application has been fully reviewed, it's time to move onto the credit report. Remember the objective here is to keep the customer focused on the "credit decision" and away from a "product decision". Take the time to explore their credit file to see if there is an explanation for any issues which may present themselves.

All too often, reviewing a credit report with a customer consisted of simply marking all derogatory information with a big, red magic marker. Raise all the red flags possible and beat the customer into submission. Public humiliation was supposed to get customers to acknowledge their bad credit, and make them accept that fact. All this is the name of big profits!

Effective credit counseling involves getting a customer to acknowledge their credit issues without the humiliation. Review the complete credit report, mentioning not only the derogatory information but the positive accounts as well. Look for a positive credit reference which can be used to build a case to present to a lender. A previous auto loan paid reasonably well, or even an auto loan that was paid well for long period of time before it was repossessed can be used as a positive reference. Look for patterns of good credit that may have preceded their current credit problems.

Ask your customer if there was something that happened to them that led up to their credit problems. A catastrophic event, such as a major illness, an employer closing or going out of business, a military call-up, or any number of personal tragedies can lead to credit issues. Now is the time for your customers to tell you their story, so you can relay it to your lenders. Review each line on the credit report with the customer. Ask for explanations and make notations where appropriate.

This may take a little longer than you're used to but it helps set the stage for reasonable expectations from your customer. It also shows them how much work you've got ahead of you to get a loan approved for them.

Take some time to explain the process. After the credit review, explain how a lender determines whether to approve an application. Review the S.A.W. principle most lenders use to consider an applicant. - Stability, Ability and Willingness to Pay. Remember that many "D" tier lenders look at more than just the credit score of an applicant, and in many cases, these lenders do not consider the FICO score of an applicant in their approval process. Marginal lenders look at the total applicant picture to determine if the will approve a deal. An applicant with a stable employment and residence history and a decent income stands a better chance of getting approved for a loan, even with a spotty credit bureau, because the lender knows they will be able to collect the payments, even if they are a little late each month!

Explain "debt to income" and "payment to income" ratios to your customers and how lenders use them to determine what vehicles they will qualify for. Many customers want much more vehicle than they can qualify for, their logic being "I can afford to pay that much". Explain how lenders, using all the data available form the vast number of loans they make, have determined which loans are most likely to be repaid and base their decisions using this date. They know that any payment which is more than 20% of an applicant's income has a much more likelihood of leading to a default and repossession. Lenders want to collect payments, and structure their approvals based on the data they have. This is especially true if a customer has had a history of slow or late payments on their previous auto loan. The lender figures "if they couldn't make that payment without some problems, I want my payment to be lower than that!" Explain that excessive monthly obligations eat up a substantial portion of their income, and most lenders will only consider applicants with less than 50% of the income being used to pay their monthly bills, including rent. This is especially true with a customer that already has an open auto loan and was not planning on trading it in. In either case, explain that the lender typically will ask for a co-signer, but you will submit the application and see what they say. Place the decision in your lenders hand, and let your customer bear the burden of meeting the lender's requirement for approval.

Take a few minutes to explain how equity can help an approval along. Lenders like to loan less than the book or wholesale value of a vehicle to marginal customers. Sometimes a large down payment can convince a lender that an applicant will make the payments, since they have a stake in the loan. Remind your customers that, while many lenders may consider a loan with no down payment, they typically like to see the taxes, tags and fees paid upfront by the customer. Many customers, who say they don't have any money available for a down payment, will have cash set aside to pay these fees. They do not view these as down payment, so make sure to ask how they plan to pay the taxes, tags and fees for the vehicle they are trying to buy.

Many customers will go from dealer to dealer trying to get a loan. Often times, they apply to multiple web sites touting easy credit approvals for bad credit customers in the hopes that someone will approve a loan for them, or give a better approval than they may already have gotten elsewhere. As a credit counselor, explain that, for the most part, dealers work with all the same lenders. While there may be one or two new lenders out in the market, you know and work with virtually all available lenders. Explain that the call back from these lenders is based on the information provided, and as such, will not vary from dealer to dealer. As a matter of fact, explain to them that multiple applications can lead a lender to turndown an application due to "excessive inquiries", which may cause a lender to think that the customer is trying to buy multiple vehicles at different dealers.

Setting customer's expectations to reality is sometimes the hardest part of the counseling function. Explain to a customer that lenders aren't in it just to help a dealership sell a car, but to insure that they can collect on the loan. Giving a customer a loan that a lender thinks the customer can't afford does no one any good. Lenders don't want to make a loan today only to repossess the vehicle tomorrow; they make their money only if they can collect the payments. Explain that, in order to help rebuild their credit; customers with credit issues must "crawl before they walk". This is all part of the process of rebuilding their credit. There has to be a strong foundation to build on; no one builds a house from the roof down!

Lenders realize that credit challenges usually result in setbacks for these customers. Your job is to help them overcome these setbacks. This is typically the beginning of the process to rebuild their credit. They have to start out with a vehicle that not only will fit their budget, but provide reliable transportation while they rebuild their payment history. Once favorable payment history is on their credit bureau, they can move up to a better vehicle with more favorable terms.

Let you customers know your dealership will be there in the future to let them know when the time is right to make that move. As their automotive credit counselor, you are in touch with to help move them along the path to better credit! Not only will they get an auto loan with your help, but by paying this loan on time, they are well on their way to a credit card and maybe even a mortgage. You can even provide them with a list of banks that provide Visa or MasterCard accounts to folks with credit challenges, or with information which may help them improve their credit reports for free, instead of throwing money away on a scam "credit repair" company.

To review the credit counseling process:

o Review the credit application

o Review the credit bureau

o Look for positive as well as negative references

o Explain the process

o Explain SAW and how a lender looks at the application

o Review debt-to-income and payment-to-income ratios

o Determine the available down payment

o Set the customer's expectations to reality

o Review the qualifying vehicles

o Review how to improve the loan

o Explain the credit rebuilding process

o Explain "credit shopping"

o The effect of excessive inquiries

Being a credit counselor before the sale will help you close that many more special finance sales. Take the time to talk to your customers about their credit situation and show that you can provide some answers to their problem. If you do this up front, you will establish a relationship with these customers that will allow you to maintain control over the sales process, which is essential for special finance. Not only that, but it prevent you from educating a customer you thought was a no sale, only to send him somewhere else to buy a vehicle.








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