Loan Contracting in the Presence of Usury Limits: Evidence from Automobile Lending

43 Pages Posted: 7 Apr 2017

See all articles by Brian Melzer

Brian Melzer

Federal Reserve Bank of Chicago

Aaron Schroeder


Date Written: March 2017


We study the effects of interest rate ceilings on the market for automobile loans. We find that loan contracting and the organization of the loan market adjust to facilitate loans to risky borrowers. When usury restrictions bind, automobile dealers nance a greater share of their customers' purchases, which allows them to price credit risk through the mark-up on the product sale rather than the loan interest rate. Despite having little effect on who receives credit, usury limits therefore have a substantial effect on who provides credit and on the terms of credit granted. Usury limits may harm defaulting borrowers, who face greater liabilities in default than they would if loan contracts were unconstrained.

Keywords: Household finance, consumer credit, financial regulation, usury limit, loan contracting, credit rationing, seller finance, captive finance

JEL Classification: D14; G2

Suggested Citation

Melzer, Brian and Schroeder, Aaron, Loan Contracting in the Presence of Usury Limits: Evidence from Automobile Lending (March 2017). Consumer Financial Protection Bureau Office of Research Working Paper No. 2017-02, Available at SSRN: or

Brian Melzer (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Aaron Schroeder

Independent ( email )

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