LAWRENCEVILLE, Ga. — In order to manage risk levels and achieve ongoing profitability, lenders need to use collateral and residuals in the underwriting process. That’s according to a new whitepaper from Black Book’s Lender Solutions division.

“Vision 20/20: Using Residuals To Spot Portfolio Growth Opportunity” illustrates the importance of how collateral and residuals can help lenders manage risk levels appropriately — particularly for longer-term loans. Despite the Fed deciding against a rate hike recently, this practice will only grow as interest rates eventually rise and lenders need better visibility in determining the position of equity for their portfolios.

Access to collateral insight and residual data can help identify the right vehicle or segments, especially in an environment where loan terms are stretched out beyond 60 months. What’s more, collateral and residual data can team together to help lenders identify their tolerable inequity levels and set terms accordingly in order to minimize risk and accelerate profit potential, officials said.

Black Book also offers specific vehicle segment examples that show how different vehicles reach a position of equity at different intervals. And while historical depreciation trends can help lenders determine varying degrees of risk for the vehicles in consideration for a portfolio, the paper also shows how lenders can maximize profit potential while minimizing this risk.

“An increasing number of lenders are realizing the importance that collateral and residuals can play in the underwriting process, and it all begins with access to accurate vehicle data,” said Barrett Teague, vice president of Black Book Lender Solutions. “This practice will only become more important as auto loan terms grow beyond 60-month terms and interest rates eventually rise, placing more pressure on the ability to minimize risk while remaining profitable.”

To view the whitepaper, click here.