Racial Dispersion in Consumer Credit Interest Rates

Abstract

Most of the literature exploring racial disparities in consumer credit markets focuses on the issue of access to loans. But the disparate terms on which loans are issued are equally revealing. In this paper, I examine disparities in a variety of consumer loan interest rates using a reduced-form framework. I find that interest rates on loans issued before the 1995 show a statistically significant degree of unexplained racial heterogeneity even after controlling for the financial costs of issuing debt. However, racial dispersion in rates falls off for loans originated after 1995.

The unexplainable racial disparity in consumer loan rates issued before 1995 implies that in this earlier period minorities faced unaccountably higher interest-rate premiums on the order of - in two examples - 20 basis points for first mortgages and 80 basis points for automobile loans. Overall, evidence of unexplainable racial dispersion in interest rates is more robust among homeowners than renters.

Keywords: Consumer debt, Consumer loan terms, racial discrimination

JEL Classification: D12, E21, G21, J15