Special Financing
What Is Special Financing?
Special financing is a segment of the auto lending industry for borrowers with a limited or tainted credit history. Special financing in the vehicle finance industry is risk based, and that means that the terms of the loan are set so the expected returns to the lender/investor are adequately great to cover the risk of default by the borrower. Special financing loans regularly carry a higher interest rate than is available to borrowers with a clean credit history.
Understanding Special Financing
Consumers who have had to deal with a bankruptcy, had a previous vehicle repossessed, or have another form of red flag on their credit history probably won't meet all requirements for traditional financing. Lenders, while reviewing a borrower's credit record, may note incidents, for example, rehashed late payments, assortment notification, and prior defaults as indication of a credit risk.
Some vehicle dealers offer their own financing options in-house, including special financing loans — additionally called "special finance" loans — that they might feature in their advertising and marketing efforts. This can include running ads that claim the dealer will work with consumers no matter what their credit history or on the other hand in the event that they have no money to put down as a deposit. These special finance offers are a method for attracting more customers to the dealership and drive up sales.
In the car dealership industry, dealers can be propelled to get out however much inventory as could be expected. The utilization of special financing is one way for dealers to increase their sales flow, especially in times when large numbers of consumers might face credit issues.
Likewise with different forms of [subprime lending](/subprimeloan, for example, for home mortgages, consumer advocates alert that borrowers may not be fully aware of the higher costs associated with special financing and that they will be unable to bear the cost of their payments for the full term of the loan. That could mean losing the vehicle through repossession.
Consumer advocates say there should be transparency between the lender and the borrower to determine whether the transaction truly appears to be legit. Even with special financing, the customer probably won't have the option to manage the cost of the vehicle they are interested in and would be better off choosing a vehicle with a lower price tag.
Before vehicle purchasers consent to a special financing loan, they ought to verify that they aren't eligible for a standard vehicle loan with additional favorable terms.
Like some other product, vehicle financing is competitive. The best way for consumers to guarantee that they are getting a competitive interest rate and fees on a special financing loan is to shop around. Yet, even before doing that, they ought to ensure that they are not eligible for a customary, less-expensive type of vehicle loan instead.
Features
- Special financing loans are offered to vehicle purchasers whose credit history would make them ineligible for an ordinary loan.
- Vehicle purchasers ought to know that special financing loans are more costly and may eventually demonstrate unaffordable, resulting in having the vehicle repossessed by the lender.
- Vehicle dealers advance special financing since it assists them with attracting customers and move inventory.
