How Does Bonus Payment Affect the Demand for Auto Loans and Their Delinquency?

45 Pages Posted: 25 Jan 2018 Last revised: 4 Sep 2019

See all articles by Zhenling Jiang

Zhenling Jiang

Georgia State University - Department of Marketing

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School

Tat Chan

Washington University in St. Louis - John M. Olin Business School

Date Written: January 12, 2018

Abstract

We study how receiving a lump-sum bonus changes the demand for auto loans and the risk of future delinquency. Unlike traditional consumer products, auto loans have a long-term impact on consumers’ financial state because of the monthly payment obligation. Using a large consumer-panel data set of credit and employment information, we find that, after controlling for the income change, receiving a bonus increases auto loan demand by 19.4 percent. These loans, however, are associated with a higher risk; the 60- and 90-day delinquency rates increase by 12.9 and 20.8 percent respectively, after controlling for credit score and income. In contrast, while receiving an increase in base salary also leads to higher demand for auto loans, it does not increase the delinquency rate. Furthermore, we find that delinquency for bonus-induced loans only increases for consumers with lower financial resources. For welfare and policy implications, evidence suggests that the higher delinquency risk is costly for both consumers and financing institutions, but financing institutions have not taken into account the increased risk when setting the loan terms.

Keywords: Consumer Financial Decision Making, Bonus, Auto Loan Demand, Delinquency Risk

Suggested Citation

Jiang, Zhenling and Zhang, Dennis and Chan, Tat, How Does Bonus Payment Affect the Demand for Auto Loans and Their Delinquency? (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=3101132 or http://dx.doi.org/10.2139/ssrn.3101132

Zhenling Jiang (Contact Author)

Georgia State University - Department of Marketing ( email )

United States

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Tat Chan

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

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