Relationships and Rationing in Consumer Loans
Purdue University Working Paper
35 Pages Posted: 24 Oct 1998
Date Written: September 1998
We empirically examine how relationships between individual households and their creditors affect the probability of being credit rationed. Using a data set where the credit rationing of individual households is observed directly, our results indicate that relationship duration and the number of activities between a family and a potential lender significantly lower the probability of being credit rationed. We also examine the relative role of relationships in the determination of the interest rates of two consumer loans - a mortgage loan and a "special purposes" loan. The distinction between the two loans is that while the mortgage loan is collateralized, the special purposes loan is signatory in nature. We show that mortgage loan rates are driven less by relationship factors than the special purposes loan rates. Overall, our results underscore the importance of the consumer's relationship with his bank in order to obtain loans and conditional on obtaining loans, to do so at relatively beneficial terms.
JEL Classification: G21
Suggested Citation: Suggested Citation