When does Ford credit recognize bad debt expense associated with a new car loan?

Question

When does Ford credit recognize bad debt expense associated with a new car loan? Every individual has a credit score, which is an approximate measures of the risk of loan defaults to potential lenders. Credit scores range from about 300 - 850, with 850 being the best credit score possible. This credit score is a combinations of several categories of history about the individual, including length of credit history, amounts owed, payment history, types of credit in use, and new credit. A general rule of thumb is that a "good" credit score is above approximately 700. In 2013, buyers with credit scores of less than 500 (poor credit risks) made up more than 27 percent of loans for new vehicles (see Bloomberg article entitled "Good job is Good Enough as Subprime Car Buyers Lift Sales"). This 27 percent compares with 25 percent in 2012 and 18 percent in 2009. Why do you think that lenders are making car loans to people with lower credit scores? What does the term "default" mean as it relates to loans Assume that Ford Credit makes a car loan on a new Ford Fusion sold to a customer in 2013. Assume that this borrower defaults on the loan in 2015. When will Ford Credit recognize the bad debt expense associated with this car sale/loan? Explain. If Ford Credit is extending credit to barrowers with lower credit scores, what would you expect to see happen to Ford Credit's allowance for bad debts balance (i.e., would it increase or decrease)? Why?

Explanation / Answer

1 Lenders can charge reasonably high interest rates while lending to people with lower crdit scores. This,to a certain extent will cover any default on the part of the borrower- when principal re -payments stop altogether.The lender might have recovered whatever he could . 2.Defualt is the failure to repay the loan , on the part of the borrower. 3. Till the date default is confirmed, the borrower will be in the accounts receivables list.Once the receivables turns uncollectible, ie. 1n 2015, bad debts is recognised. Or, depending upon the individual credit score , that indicates the measure of risk of default with respect to this customer- about his credit history and past performance- allowances for estimated   uncollectible amounts might be created - as soon as the loan is given in 2013 itself. 4.AS dicussed above, extending credit to borrowers with lower credit scores, will increase Ford Credit's Allowance for bad debts balance. Because, Allowance needs to be created once the credit is given - Depending upon the credit score against the custmer's name.

Related Questions

Navigate

• Browse (All)
• Browse W
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.