Risks of Long-Term Auto Loans
43 Pages Posted: 3 Dec 2018
Date Written: June 12, 2018
Long-term auto loans have become increasingly popular in the past decade. We find that consumers use these loans to obtain larger auto loans with lower monthly payments. After controlling for the observed risk factors typically available during the underwriting process, auto loans with maturities beyond five years have higher delinquency rates than shorter termed loans during each year in their lifetimes. These findings suggest that the financial constraints faced by borrowers of long-term auto loans are not fully captured by the borrower characteristics readily observable. We further find that the yield curve among auto loans is inverted, suggesting that a significant fraction of relative credit risks among auto loans are not reflected in pricing.
Keywords: auto loans; loan terms; long-term auto loans; loan pricing
JEL Classification: G21
Suggested Citation: Suggested Citation