Which of the following represents typical risks faced by a lender when a borrower defaults on an auto loan?

Study for the Specialist Automotive Finance Test. Use flashcards and multiple-choice questions with detailed explanations to get exam ready!

When a borrower defaults on an auto loan, the lender faces several direct and credit-related risks tied to recovering the loan. Repossession costs—such as towing, storage, and auction fees—are a typical expense. The vehicle may also depreciate in value during the recovery process, reducing the amount recoverable. There is a potential deficiency balance if the sale proceeds don’t cover the remaining loan balance, which creates a loss for the lender. Legal costs can arise from the repossession and collection process, and the borrower's credit deterioration introduces ongoing credit risk, affecting future lending performance.

Other options describe outcomes that aren’t risks in this context. Marketing opportunities and customer loyalty are potential benefits, not risks. A reduction in the loan balance would generally lessen risk rather than exemplify it. Guaranteed repayment by a guarantor mitigates risk, not represents the risk exposure.