Deal Pack Blog
What’s the risk of lending to consumers with poor credit?
Poor credit is a major factor in Underwriting but what are the risks for the Subprime Lending Industry? Some may think that there isn’t any. While statistics may have proven that there is a direct correlation between repossessions and customers with “poor credit”, there are other factors that must be considered such as employment.
Dealerships and Finance companies have decided to extend more and more credit to consumers with “poor credit” simply because of employment. Of course, there are benefits to having a perfect credit score such as options, purchasing power and a lower rate but it’s obvious that most Americans drive to work. Losing a car means losing transportation to and from work. If you can’t make it to work, you can’t pay bills. We must also consider the reasons as to why credit scores are low. A consumer could have a low credit score just by missing a few credit card payments. But, even consumers with low credit scores due to foreclosures or missing credit card payments need a way to work or around town. This creates a continuous stream of subprime borrowers.
Let’s not forget that there is a risk to lending to customers with “poor credit” but we must also face the fact that this is a part of the business. We may see higher defaults but we know that all consumers aren’t the same. Let’s not make the mistake that others often do by comparing the market for cars to the market for real estate because repossessing a car is much easier than processing a foreclosure. A foreclosure may take a year to process while a repo may take a week which makes the risk for auto lenders less than for real estate. This is one reason why consumers often pay their car loan first and car loans are a way for consumers to establish credit. Consumers are devastated when their car is being repossessed. But, the bottom line is that repossessions do not carry the same weight for the auto industry as it does for the mortgage industry and it is truly a systemic risk.
A consumer’s credit score is just a factor to consider in underwriting and isn’t the whole picture. Deal Pack Pro has many ways to assist our customers with underwriting, including pulling credit. Reach out to a Deal Pack Representative toll-free at 1-800-526-5832 to learn more.