Deal Structure
How to Structure a Special Finance Deal
Deal structure is one of the most controllable factors in whether a special finance deal gets approved. Here's what goes into it.
In special finance, deal structure refers to how all the elements of a deal are put together to maximize the chance of approval while protecting the dealership's gross and the customer's ability to complete the transaction. Poor deal structure is one of the most common reasons approvable deals get declined. Here's a breakdown of the key elements.
Vehicle Selection
The vehicle is one of the most important deal variables in special finance. Lenders have specific guidelines around vehicle age, mileage, and value. A customer with challenged credit trying to finance a high-mileage, older vehicle is a much harder deal than the same customer buying a newer, lower-mileage vehicle. Helping the customer select the right vehicle for their credit situation is a critical part of deal structure.
Down Payment
Down payment reduces the lender's risk and signals customer commitment. In special finance, down payment requirements vary significantly by lender and credit profile. Understanding what different lenders require, and what makes a deal more approvable, is essential. A deal that's declined with a small down payment may be approvable with a larger one.
Advance
The advance is the amount the lender will loan on the vehicle. Different lenders have different advance guidelines based on the vehicle's book value, the customer's credit profile, and the lender's program. Requesting more than the lender's advance guidelines allow is one of the most common reasons deals get declined.
Loan-to-Value (LTV)
LTV is the ratio of the loan amount to the vehicle's value. Lenders have maximum LTV thresholds that vary by credit profile and program. High LTV is a common deal-killer in special finance. Understanding how to manage LTV, through vehicle selection, down payment, and advance, is a core deal structuring skill.
Term
The loan term affects the monthly payment and the lender's risk. Longer terms reduce the payment but increase the lender's exposure. Different lenders have different term guidelines for different credit profiles and vehicle ages. Selecting the right term for the deal is part of structuring for approvability.
Payment-to-Income (PTI)
Lenders look at the monthly payment as a percentage of the customer's gross monthly income. If the PTI is too high, the deal may be declined regardless of the credit profile. Structuring the deal to keep the payment within the lender's PTI guidelines, through vehicle selection, down payment, and term, is essential.
Structuring for the Lender, Not Just the Customer
One of the most important mindset shifts in special finance is learning to structure deals for the lender, not just for the customer. A deal that makes sense for the customer, the vehicle they want and the payment they can afford, may not be structured in a way that a lender will approve.
The best special finance managers understand how to find the structure that works for both, getting the customer into a vehicle they can afford while meeting the lender's program requirements.
"Deal structure isn't about making the numbers work on paper. It's about making them work for the lender, and understanding the difference."
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