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Case Study Intro

Our client is a used car dealership whose business has been stagnating in recent years. They are located in a low to middle-income area in the US and in the past have only sold cars to customers who are willing to pay 100% of the cost up-front or can acquire and prove bank financing at time of purchase.

In order to boost sales, our client is considering offering loans to customers that the dealership itself will finance.

To be eligible for a loan customers must undergo a complete credit check (which we assume to be accurate). The credit check rates potential car buyers on a scale of 0 to 100, where 0 corresponds to a 0% chance of paying off the loan and 100 corresponds to a 100% chance of paying the loan in full. The client is only considering a model where each loan only lasts 1 year in which payments are made monthly and the entire loan will be paid off in 1 year’s time. Buyers ultimately fall into two categories, those that pay off the loan entirely, and those that default.

The client would like our assistance in determining whether to offer inhouse financing, what the credit check cutoff level should be (between 0-100) where we decide to give potential buyers the loan, and what issues might cause them to alter this cutoff-level.

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