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.

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