Credit Where Credit Is Due: Drivers of Subprime Credit
45 Pages Posted: 21 Jun 2017 Last revised: 1 Jul 2018
Date Written: June 25, 2018
We use individual credit histories to study how creditor-friendly repossession rights in auto lending affect borrowers. Results from a quasi-experimental setting show that bankruptcy rates among subprime auto borrowers increase twice as much following natural disasters in states with strong creditors’ rights compared to states with more borrower protection. Further tests show that auto repossessions increase the likelihood of bankruptcy, and reduce borrowers’ future access to both uncollateralized and collateralized credit, including home mortgage loans. Our findings suggest that creditors’ rights can have broad, negative effects on borrowers that extend beyond merely losing a collateralized asset.
Keywords: auto, credit, creditor rights, collateral, repossession, household, consumer
JEL Classification: D10, D14, G21, G28
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