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Michael Hirschfield

Michael Hirschfield President

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Special Finance: Getting More Approvals

Green is good in this business! There is not a Special Finance Manager in the Country that wouldn’t like to see more green checkmarks and more Approvals. Below is a proven process that will help you put some more green on the screen and in your pocket.

1: Know and Follow the Lender Guidelines

Sounds simple right? It is very frustrating to see Special Finance Managers submitting deals that are way outside the Lenders’ guidelines. DealerTrack and RouteOne have definitely streamlined the Approval process, but there is so much more to this business than just clicking a few buttons. It is imperative that you know each lenders’ guidelines and follow those guidelines in structuring and submitting deals. This means knowing the Lenders’ year and mileage guidelines, credit score guidelines, credit history guidelines, PTI (payment-to-income) guidelines, DTI (debt-to-income) guidelines, front-end advance guidelines, and back-end advance guidelines.

2: Build the Deal around PTI (Payment-To-Income) Ratio

Many Special Finance Managers structure deals according to book value and front-end advance, only to still struggle to obtain Approvals. The reason for this is I can have a vehicle that books great, have a big down payment, be requesting a front-end advance well below guidelines... and still not see an Approval all because the Payment-To-Income Ratio is too high. All deals should be built from the payment backwards to maximize both front-end and back-end profit. Lenders may make an exception on rate or collateral advance, but rarely make an exception on the PTI ratio. By building the deal around the lenders’ max payment you will see greater front-end and back-end profits not to mention more Approvals.

3: Don’t Shotgun Deals

Lending relationships are extremely valuable, but are all too often put aside in today’s market place by shotgunning deals. This is why you hear stories of Lenders being “hot” and “cold.” Dealers that have solid relationships with their Lenders see much more consistent buying. At the end of the day, it is all about building collectable contracts and a profitable portfolio with your Lenders. If your Portfolios is profitable and your contracts are collectable you will see many more Approvals. In fact, I know of a few dealers that actually get to “right their own ticket” with their top lender because the Portfolio is that strong. Make sure you call your Buyer and discuss your Portfolio on a regular basis.

4: Treat the Initial Deal Structure as a 1st Pencil

The Initial Deal Structure should be treated as a 1St Pencil. Just as a Dealership isn’t going to give a customer their “best” deal on the 1st Pencil, a Lender isn’t going to typically give a Dealer their ‘best” deal on the financing either. The goal of the Initial Structure is to begin a dialog that leads to an Approval and then a successful and profitable delivery. Asking Lenders for 160% LTV out the gate is not going to accomplish this. Instead, the Initial Deal Structure should be well within PTI guidelines with front-end advances topping out between 90%-110%. The reason for this is Lenders are going to work much harder to keep a Deal then they are to reverse a Turn-Down. Once you have some green and a direction to go, the final Deal Structure maximizing both front-end and back-end advances can be negotiated on the call-back.

4: Sell the Paper using the 5 C’s of Credit

As we all know, the Lenders main concern is that they actually get paid back the principle and interest on the contract, with minimal effort on their part. All too often when a Special Finance Manager receives nothing but turn-downs and unrealistic counter offers they give up on the deal all together. Again, all deals deserve a call back because Lenders are not typically going to offer a Dealer their “best” deal upfront. Obviously, the goal is to avoid turn-downs by following the steps above, but when you get them, you have to call the Lender and “sell” the paper. (I am assuming you have done your due diligence in creating a collectable contract) There are a lot of elements a Buyer will consider if you bring them to the surface. These elements can be summed up in the 5 C’s of Credit: Character, Credit, Capacity, Collateral, and Consideration. If the down payment or consideration is low and the credit is lacking, a Special Finance Manager needs to stress the value of the customers’ Character, Capacity, and Collateral chosen. If the Collateral is weak, you would stress the Credit and Capacity. Etc…Etc… Something to remember is Lenders like to do business with customers that are on the upswing rather than the downswing. Yes, Special Finance Lenders are used to doing business with bad credit customers, but if you are looking for a way to show how your deal is “special” and should receive an out-of-the-box Approval, you need to give the Buyer confidence that the customer will repay their debt in a timely manner. Selling the paper is becoming more and more a lost art in this business, but is truly what separates the GOOD and the GREAT!

 

 

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