Risk Based Pricing

Risk based pricing is a new banking formula that was developed by lenders at the request of the Consumer Financial Protection Bureau.
This governmental agency had tasked all major lenders to develop a means to stop potential discrimination that can occur
when consumers are purchasing a vehicle and request financing.

 

Risk Based Pricing and How Today's Automotive Lending Operates

TThis new formula has four primary factors that create a consistent and unbiased interest rate for all consumers when applying for an auto loan. The key word is “risk” and applies to all four factors.

1. The first factor is model year, which places an emphasis on new vehicles versus used. The older vehicle you finance creates a greater risk.

2. The second factor used is down payment. This factor considers the possibility of a default on the loan and subsequent loss on the vehicle. A significant down payment insures the lender will likely not incur a loss and therefore have less risk.

3. The third factor is term. Although a longer term creates more revenue for a lender and a smaller payment for the consumer, the principle in the monthly payment does not keep pace with the vehicles depreciation. Once again, a potential loss for the lender is possible if the loan is in default.

4. Last but not least, the consumer’s credit bureau score indicates the likely hood of repayment and will move the interest rate accordingly.

Unfortunately, the interest rate acquired by an auto dealer can be marked up by as much as two or three percentage points. The consumer rarely receives the same rate acquired by the auto dealer. The only way to effectively know what the auto dealer’s acquired rate will be is to Get The True Auto Rate at MyTrueAutoRate.com and see how the risk based pricing factors effect rate.

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