Subprime Auto Loans Just Hit Their Worst Delinquency Rate in 32 Years. Here's What It Means for Lenders.
Making subprime auto loans is a risky business, but it is very different from the rest of the auto loan market.
Overview
Making a loan is a big decision for a lender. The lender must assess the likelihood of repayment in a timely fashion. The higher the loan's risk, however, the higher the interest rate the lender can charge. So there are trade-offs that have to be made. The auto loan space has a history of companies taking on too much risk. That is a problem for investors today, as subprime auto loan delinquency rates are high.
When you buy a stock, you become a part-owner of the business. This is why it is so important to understand the companies you invest in. If you don't fully understand what the business is doing, you can't properly assess the risks and potential rewards of the investment. This is particularly important for companies that make auto loans.
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Originally published at www.fool.com.