Skip navigation
Quick, Early Lesson on Three Cs of Credit

Quick, Early Lesson on Three Cs of Credit

Lenders consider character, capacity and collateral when deciding whether to approve financing.

I started as a management trainee (read “collector”) for a regional small loan company. Some still refer to it as a mouse house.

With a big-boy job, I figured credit would be easy to come by. After all, the $200 credit-union loan to buy my camera was paid back on time.

I was shocked when the bank denied my request. On the second day on the job, I complained to my boss about being turned down.

That’s when I got a quick lesson about the 3Cs of credit: character, capacity and collateral. The theory is that these components must be balanced to get financing.

Then I got in to the car business and learned the underlying theorem of spot deliveries: cash is king.

Like rock, paper, scissors where each one of the plays can win depending upon your opponent’s play, cash helps the collateral component. Enough cash can overcome a poor credit score or character. But you’d have to get enough cash to cover all but taxes and fees if the applicant lacks the capacity to meet obligations.

Sales managers usually look for a nice percentage of cash down when starting car-deal negotiations. Twenty percent seems like the common starting salvo to gauge customer willingness and ability to help the deal. Then the scramble for sources of cash starts.

A popular source for repeat customers is to use refunds of finance and insurance product cancellations from the prior deal if the customer is trading the original vehicle.

With some previously purchased F&I products, refunds of unearned premiums is the customer’s money, if the loan is paid off. There is not an issue in using the refund as a down payment on the next transaction.

Accounting for the exact amount of the refund can create potential compliance issues in deals using money from early cancellations for some or all of the cash down payment on the new deal.

Whether the product company’s website is down for periodic maintenance or the deal is after hours or whatever, the exact amount of the refund is not always known.

Many times, the sales manager or F&I manager is left to estimate the refund amount. That shortcut can create issues.

Issue No.1: The amount of the refund is less than the estimated amount disclosed on the retail installment sales contract (RISC) or lease agreement (Lease).

For example, assume the sales manager estimates a $2,000 refund and pencils the deal with that much cash down. The F&I manager spins the deal disclosing a $2,000 down payment. But the billing clerk confirms the actual refund as $1,925. The office manager adjusts the gross profit on the deal by $75 to absorb the short collection.

There are potential problems with absorbing the shortfall. It probably violates your lender agreement that basically requires a receipt to match the amount you disclose on the RISC or Lease. Without an exact match, you have bad disclosure and a possible violation of regulations.

In some states, the shortfall could be considered a dealer rebate and therefore a violation of statutes that prohibit those.

Issue No.2: The amount of the refund is more than the estimated amount disclosed on the RISC or Lease. This only is an issue if you do not refund the overage to the customer and instead keep it to enhance your gross.

Using product-cancellation refunds can be a powerful tool to structure a new deal from a 3Cs perspective. Moreover, it reminds the customer that purchased F&I products not only are good because they cover potential calamities, but also because refunds from unused portions can go toward future transactions.

Just get the refunds properly accounted for. Continued good luck and good selling.

Gil Van Over is the president of gvo3 & Associates, a nationally recognized compliance consulting firm that specializes in F&I, sales, safeguards and compliance. Website:

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.