Collateral Value and Strategic Default: Evidence from Auto Loans

51 Pages Posted: 24 Jul 2018 Last revised: 4 Aug 2018

See all articles by Dimuthu Ratnadiwakara

Dimuthu Ratnadiwakara

University of Houston - C.T. Bauer College of Business, Students

Multiple version iconThere are 2 versions of this paper

Date Written: July 23, 2018

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

Suggested Citation

Ratnadiwakara, Dimuthu, Collateral Value and Strategic Default: Evidence from Auto Loans (July 23, 2018). Available at SSRN: https://ssrn.com/abstract=3218515 or http://dx.doi.org/10.2139/ssrn.3218515

Dimuthu Ratnadiwakara (Contact Author)

University of Houston - C.T. Bauer College of Business, Students ( email )

Houston, TX
United States
713-743-4937 (Phone)

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