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The Effect of Repayment Through Payroll Deduction on Personal Loan Interest Rates

Eduardo Augusto de Souza Rodrigues
Central Bank of Brazil - Sao Paulo Office - Studies and Research Department

Victorio Chu
Central Bank of Brazil - Sao Paulo Office - Studies and Research Department

Leonardo S. Alencar
Central Bank of Brazil - Office of Sao Paulo - Research Department

Tony Takeda
Central Bank of Brazil - Sao Paulo Office - Studies and Research Department

June 2006

Central Bank of Brazil Working Paper No. 108

Abstract:
This paper examines the impact of payroll debit loans - a Brazilian new modality of credit - on interest rates. The main characteristic of the new credit operation is the enforcement of a direct deduction of amortizations from personal payroll checks. Adapting a matching strategy proposed by Heckman, LaLonde and Smith (1999), and using a data sample that considers individuals that take out bank loans both with and without payroll deductions, we find that the new modality reduces loan interest rates significantly. Nevertheless, this reduction is half of what was expected using aggregate data. Besides these, the paper presents a sensitivity analysis for the case of sequential banking.

Note: Downloadable document is in Portuguese.

Keywords: Personal Loans, Interest Rates, Default Probability, Payroll Deductions

JEL Classifications: C21, D86, E43, G21

Working Paper Series

Date posted: August 24, 2006 ; Last revised: May 28, 2007

Suggested Citation

Souza Rodrigues, Eduardo Augusto de, Chu, Victorio, Alencar, Leonardo S. and Takeda, Tony, The Effect of Repayment Through Payroll Deduction on Personal Loan Interest Rates (June 2006). Central Bank of Brazil Working Paper No. 108. Available at SSRN: http://ssrn.com/abstract=926385

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Contact Information

Leonardo S. Alencar (Contact Author) Central Bank of Brazil - Office of Sao Paulo - Research Department ( email ) Av. Paulista, 1804 - 4o andar Sao Paulo, SP 01310-922 Brazil
Victorio Chu Central Bank of Brazil - Sao Paulo Office - Studies and Research Department ( email ) Av. Paulista, 1804 - 4o andar Sao Paulo, SP 01310-922 Brazil
Eduardo Augusto de Souza Rodrigues Central Bank of Brazil - Sao Paulo Office - Studies and Research Department ( email ) Av. Paulista, 1804 - 4o andar Sao Paulo, SP 01310-922 Brazil
Tony Takeda Central Bank of Brazil - Sao Paulo Office - Studies and Research Department ( email ) Av. Paulista, 1804 - 4o andar Sao Paulo, SP 01310-922 Brazil

Abstract

Date posted: August 24, 2006 ; Last revised: May 28, 2007

Suggested Citation

Contact Information

Leonardo S. Alencar (Contact Author)

Victorio Chu

Eduardo Augusto de Souza Rodrigues

Tony Takeda