Deal structuring for-profit and deliveries is an Art Form. Much like other art forms – painting, dance, music composition and hitting the low and away slider – it is usually perfected by ten thousand hours of practice. Ten thousand hours translates to eight hours of practice seven days a week for 1,250 days or three years and five months. Unfortunately, most new F&I people do not work seven days a week and do not spend eight hours per day actually structuring deals, so it usually takes longer than the three years and five months for true deal structure artists to emerge.

Before we get into the Art of Structuring Deals, let’s first talk about the components of the deal structure:

DEAL STRUCTURE COMPONENTS

Old-timers in F&I and Banking used to talk about the Five C’s of a deal:

  1. Capacity – the customer’s ability to pay the new payment based on payment to income and overall debt to income ratios. More about these ratio’s later.
  2. Credit – the customer’s previous loan history and their credit score which comes from an algorithm the credit bureau folks use to predict the customers’ probability to pay.
  3. Collateral – the vehicle securing the loan and the loan amount requested compared to the value of the collateral based on the book value of the collateral. More about this ratio later.
  4. Cash – how much money the customer has down. It is usually believed a larger cash investment makes the customer less likely to default and lose his investment.
  5. Character – how stable is the customer based on time and job, time at address, homeowner vs. renter, the stability of the job and employer, etc…

Over the last few decades, most lenders have developed internal credit scoring models that take the following factors into consideration.

LTV – Loan to Value (LTV) is how much the consumer is trying to borrow divided by the vehicle’s Book Value. Example is customer is trying to borrow $24,000 on a vehicle that Books for $20,000 = $24,000 ÷ $20,000 = 120% LTV.

BOOK VALUE – Book Value is the published value of the vehicle based on year, make, model, trim level, accessories, and the vehicle’s mileage. There are several publishers of market-based vehicle valuations.

CASH DOWN – Cash down is exactly what it says: Cash Down. Cash Down is important, but its importance has diminished somewhat as unscrupulous dealers have found ways to inflate this figure.

TRADE EQUITY – Trade Equity is the trade-in value the dealer gives the customer minus any loan payoff amount still due on the trade-in. This value can be positive or negative. The more positive the Trade Equity the better, the more negative the Trade Equity the worse for the probability of the deal of getting approved. Example: Dealer values customer’s vehicle at $13,500 and customer has a $6,500 payoff = $13,500 – $6,500 = $7,000 of positive Trade Equity. A negative example is a customer owes $19,000 on a wrecked and unrepaired vehicle that the dealer values at $3,000 = $19,000 – $3,000 = $16,000 Negative Trade Equity.

YEAR OF VEHICLE/MILEAGE – Almost all lenders have Lending Guidelines that prohibit vehicles older than a set model year or above a set mileage. You need to have Inventory that is financeable with the majority of your lenders.

CREDIT – The customer’s credit score is very important. On top of the credit score, there is also the consideration of “comparable” credit. Comparable credit is credit paid as agreed with a similar payment or a similar loan amount. Comparable credit is why a customer with one or two credit cards with a $1,500 credit limit and a 712 credit score cannot finance a $40,000 used Corvette.

PTI – Payment to Income (PTI) is the estimated new payment divided by the customer’s gross monthly income. Example is estimated new payment of $400 and customer’s gross monthly income is $4,000 = $400 ÷  $4,000 = 10% PTI. Different banks have different PTI limits.

DTI – Debt to Income (DTI) is the total monthly outgo of the customer including rent or mortgage, the new estimated payment, and all monthly payments showing in the customer’s credit bureau. Example is $2,000 of rent, new vehicle payment and other credit card and loan payments and the customer’s gross income is $4,000 = $2,000 ÷ $4,000 = 50% DTI.

AVAILABILITY – Availability is the total of all the outstanding balances on the consumer’s revolving credit lines divided by the total of all of the revolving credit limits. An example is a customer has two revolving credit accounts, one has a credit limit of $1,000 with an $800 balance and the second revolving account has a credit limit of $2,000 with a $700 balance = $1,500 of total balances ÷ $3,000 overall total revolving credit limits = $1,500 ÷ $3,000 = 50% Availability

STABILITY AT RESIDENCE – Stability at residence is just what it sounds like – how long the customer has been at their current address. Longer time at address improves the probability of approval.

STABILITY AT EMPLOYER – Stability at the employer is just what it sounds like – how long the customer has been at their current employer. Longer time on the job improves the probability of approval.

SATISFACTORY EXPLANATION OF DEROGATORY CREDIT – If the customer has any derogatory information in their credit file, a satisfactory explanation of the derogatory information may help counteract the derogatory information.

So, ok now we have a list of terms and descriptions, the components of deal structure, the lingo of the business if you will, but terms and descriptions are like paint and paintbrushes – they don’t make an artist – being able to see a scene in a different way and being able to illustrate the scene in a way that reaches and communicates with the viewer is what makes an artist.

Now the F&I artist needs to know each of his/her lenders’ requirements and criteria for their various levels of loan approvals. Once an artist knows a lender’s likes and dislikes they can emphasize the likes and shade over and compensate for the dislikes. Also, an artist must know which lender guidelines are non-negotiable, so they don’t waste the lender’s time trying to make a non-starter deal into something.

In today’s marketplace, almost all lenders use some sort of an automated system to speed up the loan decision process. If the computer approves the deal either the deal was written where it luckily fit into the lender’s box or it was structured by someone to make it fit into the box. If the computer doesn’t approve the deal that’s when the artist really earns their commission. The artist should be on a first-name basis with their loan officers at all their lenders and be well versed in the loan officer’s personal likes, dislikes, family members, previous employment, education, favorite sports/pastimes, etc, etc… In addition to all that the artist should know how many apps he has sent each lender, each lender’s approval ratio and how many of the approvals the artist has booked with each lender. It is very hard to tell a lender they owe a favor when you don’t know your own numbers.

The point of knowing all the lenders’ requirements, cultivating a personal friendship with the loan officer, and knowing all the dealerships statistics with that lender is then the artist can say: “I realize the computer probably auto-declined this offering because of ________, but as you can see it has nine of the eleven characteristics your bank likes and the ________ and the ________ are very favorable compared to your banks’ normal requirements. C’mon, I need a little help here and you and I both know I book 82% of the approvals you give me.” That statement will get an artist a lot more than an inexperienced F&I person calling and asking: “Why didn’t you buy my deal?”

Almost any F&I Manager/Title Clerk can take a check or cash from a customer and deliver a vehicle. Fewer F&I Managers can take a credit application and submit it to all their lenders and see if they get any approvals and then deliver the vehicle. Even less F&I Managers can take the application, digest the information regarding the customer and the collateral and send the application to the ONE lender that this particular loan fits the best and/or the ONE lender that makes the dealership the most money.

As you can imagine the title clerk/cash deal makes the least profit for the dealership on average and the deals done by the specialist make the most per deal on average. The other side of the coin on the title clerk versus inexperienced F&I versus experienced F&I Artists is the compensation of the title clerk is relatively inexpensive and is usually hourly based while the compensation of the experienced F&I Artist is usually commission-based and usually has a draw or guarantee of a sizable amount. This income requirement for an experienced F&I Artist typically keeps small independent car dealers selling less than 75-100 units a month from being able to afford an artist even though the artist would generate more income per retail delivery.

If your dealership does not have the sales volume to support an F&I Artist or hasn’t been in business long enough to have a full range of lenders you can use Vantage Finance’s F&I Artists and improve your bottom line as you grow your dealership.

Click HERE for more information.