Special Finance

Special finance usually refers to financing for individuals or small businesses that cannot obtain financing by traditional means. There are several subclasses of special finance.

SUBPRIME

Subprime lending is lending to any individual or business that is not classified as prime. These individuals usually have a lower credit scores (FICO of 640 and under), high debt to income ratios, and/or insufficient collateral to cover the loan. Subprime lending can be extended for any reason, however most of the time it is used for asset purchases.

STATED INCOME

Stated income loans are used for individuals who have high credit scores but who are unable to verify their income via pay stubs or W-2’s. Traditionally, stated income loans are extended to self-employed people who have difficulty proving their income. The credit grantor asks the borrower to state their income. The borrower is taken at their word without verification.

Stated income loans are usually easier to come by in times of economic boom and harder to come by in times of economic recession.

HIGH RISK LOANS

A high risk loan is any loan extended to a borrower who has a low credit score, high income to debt ratio, or insufficient collateral to cover the loan. These loans are always subprime.

BAD CREDIT AUTO LOANS

Over the past decade there has been a rapid increase in the number of companies that offer buy here pay here special finance deals for automobiles. These loans are usually extended to borrowers with poor credit. The lender only verifies the borrower is working and is making enough to cover the payment. The interest rate for the loan is usually very high (in most cases the state allowed maximum) and has very unfavorable terms for the borrower. In some cases if the borrower is as little as 1 week late the lender can repossess the vehicle.

In addition to the loan carrying a very high interest rate, the vehicle itself is usually sold at a price in excess of what it is worth. The lender generally will not bargain in regard to the loan interest rate or vehicle price. The lender believes the customer has no other option and is forced to take the bad deal.

Bad credit auto loan companies are often classified as predatory lenders.