Financing Glossary of Accounting and Budgeting Terms
Understanding these terms helps you access the right financing options for your customers.
When your dealership sells RVs or boats, you need to offer financing services that help your customers pay off their investments over a reasonable period of time. When you offer financing services, it’s best if you can explain relevant financing terms to your customers to help them choose the right options. Our financing glossary introduces you to the accounting and budgeting terms you may need to explain to your customers.
Accounting and Budgeting Terms You Need to Know
Whether you need to learn boat financing terms, RV financing terms, or both, this list will help you learn the basics:
- Compound Interest Loan: Unlike a simple interest loan, a compound interest loan accrues interest over time. The interest may accrue annually, daily, or continuously. A compound interest loan’s period consists of the principal amount plus any interest already accrued. Long-term loans often have compound interest.
- Debt-to-Income (DTI) Ratio: A customer’s DTI ratio determines how much of their monthly income goes to paying off debt. If they have a low DTI ratio, lenders consider them more attractive. Lenders are more likely to take on borrowers with a 40% or lower DTI ratio. You can calculate a customer’s DTI ratio by dividing their monthly income by their monthly debt payments. A customer’s current home and car loans get factored into their monthly debt payments.
- Liquidity Statement: A liquidity statement shows a customer’s ability to pay off their debts. Examples of liquidity statements include bank statements, 401Ks, and IRA statements.
- Loan Term: A loan term is the set of conditions that come with a loan, including its repayment period length, interest rate, and other associated loan fees. Lenders often refer to recreational loans in months rather than years. So, if you get a loan for a recreational vehicle, it’s likely a 24-month or 48-month loan rather than a two-year or four-year loan.
- Payment-to-Income (PTI) Ratio: The PTI ratio measures how much of your customer’s monthly take-home pay their new vehicle payments will take up. Lenders prefer it if your PTI ratio is around 10% to 12%.
- Payoff: A payoff occurs when you trade your boat or RV in, but you’re still paying it off. In a payoff situation, you’re still paying for the vehicle, even though you no longer have it.
- Personal Financial Statement (PFS): A personal financial statement is a document that outlines your customers’ financial status at a certain point in time. A PFS includes information such as a customer’s assets and liabilities. When your customers provide personal financial statements, they’re offering an assessment of their current financial health. Lenders use a PFS to determine whether a customer has good credit, making them a good financial risk.
- Proof of Income (POI): When your customers sign up for a loan, they need to provide proof of income to show that they can make their monthly payments. Typical forms of POI include pay stubs, W-2 forms, and bank statements.
- Simple Interest Loan: This type of loan works best for short-term loans rather than long-term ones. When your customer pays off a simple interest loan, they pay off the interest every month. You can calculate a simple interest loan by multiplying the loan’s principal amount by its daily interest rate by the number of days between payments.
How Does Finance Solution Improve Your Dealership’s Financing Services?
When you partner with Finance Solution, you outsource your finance and insurance (F&I) services to us. We use our resources to access the right options for your customers’ financial needs. We handle all the details of financing a boat or RV while your team focuses on working with customers and moving units through your dealership. We improve your dealership’s financing services by taking that load off your staff and handling it for you.
Outsource Your Finance Department With Finance Solution
If you’re ready to outsource your dealership’s finance department, reach out to us today. We put our resources to work to find financing options for your customers as quickly and efficiently as possible. Let us take care of your financing and insurance services, so you can focus on customer service and moving more units through our dealership to your customers.
Move More Units
Dealerships that outsource their F&I through Finance Solution regularly see a 20% bump in approvals and, by extension, units moved off the lot. We do what it takes to secure the financing and then the profits will follow. nsion, units moved off the lot.
