When it comes to the borrower/lender relationship, we rarely get to see things from the auto lenders’ point of view. When you submit your loan application, what does a lender look for in the details? In the effort to give you, the borrower, deeper insight into the process, this article outlines how an auto lender “grades” your application for a lender’s number one concern: RISK.
Calculating and Managing Risk
For any lending institution to stay in business, it has to managing risk effectively. The higher the risk a borrower could default on his or her payments, the more money the lender needs to stand to make from the loan agreement. Hence, higher interest rates for poor credit auto loans. A good illustration of all this comes from Hollywood. Most of us don’t know any loan sharks, but they are the backbone of a ton of movies. And, if you think of such movies, the loan shark always charges an absurdly high interest rate. Why? RISK. Usually, they are lending money to a disreputable character, which is…well, risky, and usually this character does not have the assets to pay off the loan should he fail to make payment. There is a very good chance that the loan shark will get nothing back (except for kneecaps and fingers, of course). 
How an Auto Lender Determines Risk — Credit, Character and More
The five primary risk factors: character, collateral, ability, and stability. We’re going to address each of these in forthcoming posts to give you, the borrower, better insight into what happens when you submit your auto loan application. These factors apply to traditional banks, subprime auto lenders, bad credit dealerships, and everything between.
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