DEFINITION of 'Special Finance'

Special finance is a segment of the auto lending industry for borrowers with a limited or tainted credit history. Special financing in the auto finance industry is risk based, which means that the terms of the loan are set so that the expected returns to the lender/investor are great enough to cover the risk of default by the borrower. Special finance loans typically carry a higher interest rate than is available to borrowers with a clean credit history.

BREAKING DOWN 'Special Finance'

Consumers who have been through a bankruptcy, had a previous vehicle repossessed, or have some other form of impairment on their credit history might not qualify for traditional financing. Lenders, when reviewing a borrower’s credit history, may note incidents such as late payments, collection notices, and prior defaults as sign of a credit risk.

How the Auto Industry Uses Special Finance

Some auto dealers may offer their own financing options in-house, including special finance loans that they make part of their advertising and marketing campaigns. This can include running ads that claim the dealer will work with consumers regardless of credit history or if they even have any money to put down as a deposit. These special finance offers are a way to attract more customers to the dealership and drive up sales.

By showing consumers there are welcome to applying for financing regardless of their background, the potential for new buyers and sales increases. In the auto dealership industry, there can be a focus on clearing out as much inventory as possible. The use of special finance can be a way for dealers to increase their sales flow, particularly in times when consumers may face credit issues.

There may be concerns, as with forms of subprime lending in other industries such as real estate, of borrowers not being fully aware of the higher costs associated with special finance, which they may not be able to afford for the term of the loan. This increases the need for transparency between the lender and the borrower to determine if such a transaction is truly feasible. Even with special finance, the customer might not be able to afford the vehicle they are interested in and may have to choose a car with a lower price tag.

Special finance auto loans should be shopped around by a borrower. Like any other product, auto financing is competitive. The best way a consumer can ensure that he or she is getting a competitive market price (rate) on a special finance loan is to shop around.

RELATED TERMS
  1. Finance Charge

    A finance charge is a fee charged for the use of credit or the ...
  2. In-House Financing

    In-house financing is a type of seller financing in which a firm ...
  3. Asset Financing

    Asset financing uses a company’s balance sheet assets, including ...
  4. Second Chance Loan

    A second chance loan describes a number of credit options marketed ...
  5. Acquisition Financing

    Acquisition Financing is the capital that is obtained for the ...
  6. Credit History

    Credit history refers to the ongoing documentation of an individual's ...
Related Articles
  1. Personal Finance

    Auto Loan Balances Soar to $1.22 Trillion in 2017

    Consumer auto debt has continued to snowball, a reflection of continued optimism about the economy. But there could be a downside.
  2. Personal Finance

    6 Steps to Getting a Car Loan With Bad Credit

    Having bad credit does not mean you can't get a car loan. Follow these steps to improve your chances of getting a loan with terms you can live with.
  3. Personal Finance

    Americans Are Borrowing More To Buy Cars - But Should They Be?

    As the economy slowly heals, credit has become easier to obtain and interest rates have gone down. But does that mean it's wise to take on a car loan right now?
  4. Small Business

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  5. Personal Finance

    Auto Loans the Next Subprime: Jamie Dimon (JPM)

    JP Morgan Chase CEO Jamie Dimon issues a prescient warning over stress in the auto loan market to investors in New York.
  6. Personal Finance

    Lines of Credit: The Basics

    Learn how lines of credit, hybrids of credit cards, and normal loans, can help or hurt your finances. Determine what is right for you.
  7. Small Business

    The basics of financing a business

    From debt financing to equity financing, there are numerous ways to fund a business startup. Find out which one is the best funding model for your company?
  8. Investing

    The difference between finance and economics

    Learn the differences between these closely related disciplines and how they inform and influence each other.
  9. Personal Finance

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  10. Personal Finance

    A Good Credit Score: Why Do You Need It?

    Your credit score can affect your ability to borrow money, buy a house or even get a job.
RELATED FAQS
  1. What is finance?

    Finance is the study of how money is managed and the process of acquiring needed funds. Personal finance, corporate finance ... Read Answer >>
  2. How does a credit crunch occur?

    We examine the systemic and pervasive effects of a credit crunch, which occurs when a lack of funds available in the credit ... Read Answer >>
  3. What is the difference between a loan and a line of credit?

    Understand how to differentiate between lines of credit and standard loans. Then determine when you are most likely to use ... Read Answer >>
  4. Understanding the Five Cs of Credit?

    Learn how the five C's of credit affect new credit application decisions, and understand how a lender analyzes each aspect ... Read Answer >>
Trading Center