Collateral Value and Strategic Default: Evidence from Auto Loans

Abstract

I analyze the impact of changes to collateral value on borrowers' default decision on auto loans using two types of natural experiments in Sri Lanka. Changes in vehicle import tax rates and loan-to-value ratio caps on auto loans generated plausibly exogenous variation in the resale value of vehicles already pledged as collateral. Using proprietary auto loan performance data, I estimate that a 10% drop in the collateral value corresponds to a 44% increase in the default rate. I also find that collateral value is more important for borrowers with higher outstanding loan balances.

Keywords: Strategic Default, Collateral Value, Auto Loans

JEL Classification: D12, D14, G23