No credit check auto loans are termed as secured loans by the experts, because in these loans the vehicle purchased by the borrower is part of the loan's collateral. However, vehicles depreciate, so financial institutions need additional collateral to secure the vehicle loan without a credit check.

When lending funds, the bank inquires from the borrower the purpose for which he seeks the loan. Banks do not grant loans for each and every purpose--they ensure the safety and liquidity of their funds by granting loans for productive purposes. Loans are not advanced for speculative and unproductive purposes, like social functions, ceremonies or for the repayment of a prior loan.

Banks and financial institutions use the principle of diversification of risks when giving auto loans. A prudent banker always tries to select the borrower very carefully and takes tangible assets as securities to safeguard his interests. Tangible assets are no doubt valuable and the banker feels safe while granting advances on the security of such assets, yet some risk is always involved therein.

Banks are profit-earning institutions. They must employ their funds profitably so as to earn sufficient income out of which to pay interest to the depositors, salaries to the staff and to meet various other establishment expenses. In no credit check auto loans, the variations in the rates of interest charged from different customers depend upon the degree of risk involved in lending to them. A customer with a good reputation is charged a lower rate of interest as compared to an ordinary customer.

The sound principle of lending is not to sacrifice safety or liquidity for the sake of higher profitability. That is to say, banks should not grant advances to unsound parties with doubtful repaying capacity, even if they are ready to pay a very high rate of interest. Such advances ultimately prove detrimental of the interests of the bank and its depositors.