Subprime lenders extend credit to high-risk individuals in exchange for increased interest rates and account related fees. Subprime lending is lucrative for financial institutions, but the potential of profit comes with an increased amount of risk usually in the form of customers who default on their loan obligations. The problem is that loan requirements that are too stringent will serve to reduce the number of approved borrowers, but a professional consultant will use market trends and current policies to create lending requirements that mitigate risk and maximize profit potential.
Before a loan is approved a creditor will examine a person’s credit report that shows their ability to repay loans. By observing historical statics and monitoring items such as debt to income ratio and default percentage, a lender will be able to create a likelihood of default based on historical data. A credit score is an integral part of the approval process but does not offer the same insight as a full credit report examination.
Another critical factor is a client’s ability to maintain employment. Frequent changes that do not result in higher income potential may be an indicator of a person’s overall financial stability and should be considered when deciding whether or not a loan is approved during the underwriting process. Though it shouldn’t be a sole determining factor, it does provide a company with insight into a person’s ability to maintain long-term employment.
The creation of risk pools is a growing trend among subprime lenders, as it allows a company to increase their profits while controlling their risk. Most companies have three pools that consist of low, medium, and high-risk profiles. Each pool is assigned a maximum number of borrowers which allows an organization to reduce the effects of defaulted loans and increase profits by increasing the number of approved applications.
A well-designed risk mitigation process will provide a company with stability and maximize profits. The team at Cane Bay Partners helps lenders of any size improve financial security by decreasing the chances of loss based on accurate data. Contact them today to learn more and see how easy growing a company’s asset portfolio should be.