Barring the rare exceptions that prove the rule, auto finance lenders choose their clients based on the potential to earn a profit on the outstanding sums. In main, the potential to earn a profit can be considered a combination of the interest being charged on the outstanding sum and the chances of the auto finance consumer defaulting on the same. For example, if a lender stands to earn $2,000 in interest on a $20,000 loan that is meaningless if said loan has a 50 percent chance of being defaulted upon with nothing recoverable. In fact, based on the stated circumstances, said lender has an expected outcome of -$9,000, based on a 0.5 chance of $2,000 and a 0.5 chance of -$20,000.
How Auto Finance Lenders Can Influence Expected Outcomes
However, auto finance lenders have methods that can be used to influence both interest calculation and chances of default for the purpose of increasing their expected outcomes. For example, some lenders choose to set higher interest rates to compensate for higher chances of default, while others restrict their lending of auto credit to a more selective clientele. In practice, these methods can be seen in how people with bad credit either cannot secure auto credit or have to secure it at higher costs than their counterparts. However, seeing as how lenders can influence expected outcomes to protect their profits, it should come as no surprise that borrowers can influence the same so as to benefit from more lenient borrowing conditions.
How Auto Finance Consumers Can Use Collateral to Compensate For the Same
One of the best methods for securing more lenient borrowing conditions on auto credit is to put up collateral. This is a simple but effective method that serves to raise the auto finance lender's outcome in case of default, which has a direct effect on the expected outcome of outstanding auto credit. For example, an asset worth $20,000 being used as collateral would be enough to convince a lender to offer $20,000 in auto credit to a borrower with even chances of defaulting and not defaulting in exchange for $2,000 interest. This is because in the case of the borrower defaulting upon the outstanding auto credit with nothing recoverable, the lender has an outcome of $0 because the $20,000 in collateral makes up for the $20,000 lost in outstanding auto credit. As a result, the lender's expected outcome changes from -$9,000 to $1,000, which makes the borrower a profitable prospect.
For getting more information about auto credit, contact Automax. Fill out a simple form and we will make sure you get your auto finance at the lowest interest rates in Gatineau area.
By : Gustavo Natotschiev Lopes
Article Source: http://EzineArticles.com/?expert=Gustavo_Natotschiev_Lopes
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