When a lender does not approve the deal as submitted and either declines the deal or offers a conditional approval, they are basing that decision on risk. 

You may feel from time to time that the analyst you are talking to is looking for ways to say “no” to your deal. The opposite is true, they want to say yes. Like us, they get paid on performance, volume, and profit.  The catch is they have guidelines that determine their decisions on the deals you submit.

Lenders have a group of very smart people that calculate how the capital they have allocated for vehicle loans should perform over time. To oversimplify, they predict the future. If a specific amount of money is placed in vehicle loans based on certain conditions or guidelines, it should provide a specific return (profit) by a predetermined time.

The better you understand the lending guidelines of each of your lenders, the better you will be able to match each deal to the lenders who will give you the most favorable terms. 

Most lenders will base their initial approval, condition, or turn-down of your deal based on their guidelines. These guidelines will often vary from lender to lender, however, there are three constants that every lender considers when deciding to offer credit to your customer. They are:

• Character

• Capacity

• Collateral

Character is payment history, capacity is debt-to-income and payment-to-income ratios, and collateral determines the advance terms based on factors such as the age of the unit and loan-to-value (LTV) ratio.

The lender’s system is determining risk based on how the deal was submitted. The initial decision is software determined, and the offer is generated by analyzing the information submitted to the lender based on the lender’s decision guidelines, with limited human evaluation. 

The two most important factors to a lender are character and capacity. These two factors determine about 65% of the decision. Can the applicant afford the payment? What is the probability they will make the payments on time?  

Character

If there are late payment issues or a period of slow pay in your customer’s credit report, be prepared to talk to your lender about it. They will want to know a few things: Why it happened, what they did to correct it, and why it won’t happen again. Many things can cause a period of slow pay such as illness, employment gaps, pandemics, and so on. 

Get the details and provide the information they will need to justify the additional risk you are asking the lender to take to approve your deal.

Capacity: Debt to Income and Payment to Income

Most lenders will want to see current debt no more than 40-45% of monthly income, with a car payment of around 18% of the monthly income. Before you call back the lender, do the math. If DTI is an issue, verify balances on their report. Maybe they just paid off that high credit card balance and it isn’t showing yet? Is there a second source of income? 

Collateral

Usually, you can negotiate a better approval by getting more down payment or looking for more equity from a trade or alternative collateral thus limiting the lender’s risk.

If you still can’t quite get there, ask your analyst to give you a way to go. Ask them where their system will approve the deal. This is the only place I endorse “If I could, would you.”

If you are way off, you may need to restructure the deal by changing the collateral and rebuilding a structure that will work. Either way, look for information and solutions that may solve the lender’s risk problem. Shorten the term, get more cash down, add a co-signor — you get the idea. Change the risk, change the approval, or change the condition. 

Lastly, it is best to submit a deal structure you know the lender’s system will approve. For example, submitting a deal at 150% LTV when the guidelines state a max LTV of 120% will only result in an automatic decline. Better to submit at LTV that has a chance and negotiate up rather than starting from a “no.”

If you want to get those tougher deals approved, know your lender’s guidelines, and think about what you, together with all stakeholders in the deal, can do to lower the lender’s risk.

John Tabar serves as executive director of training for Brown & Brown Dealer Services.