Monthly Payment Targeting and the Demand for Maturity

65 Pages Posted: 19 Mar 2019

See all articles by Bronson Argyle

Bronson Argyle

Brigham Young University - Department of Finance

Taylor Nadauld

Brigham Young University

Christopher Palmer

MIT Sloan; National Bureau of Economic Research (NBER)

Date Written: March 2019

Abstract

In this paper, we provide evidence of the importance of monthly payments in the market for consumer installment debt. Auto debt in particular has grown rapidly since the Great Recession and has eclipsed credit cards in total debt outstanding. Auto-loan maturities have also increased such that most auto-loan originations now have a term of over 72 months. We document three phenomena we jointly refer to as monthly payment targeting. First, using data from 500,000 used auto loans and discontinuities in contract terms offered by hundreds of lenders, we show that demand is more sensitive to maturity than interest rate, consistent with consumers managing payment size when making debt decisions. Second, many consumers appear to employ segregated mental accounts, spending exogenous payment savings on larger loans. Third, consumers bunch at round-number monthly payment amounts, consistent with the use of budgeting heuristics. These patterns hold in subsamples of constrained and unconstrained borrowers, challenging liquidity constraints as a complete explanation. Our estimates suggest that borrower focus on payment size, combined with credit-supply shocks to maturity, could significantly affect aggregate outstanding debt.

Suggested Citation

Argyle, Bronson and Nadauld, Taylor and Palmer, Christopher, Monthly Payment Targeting and the Demand for Maturity (March 2019). NBER Working Paper No. w25668, Available at SSRN: https://ssrn.com/abstract=3354321

Bronson Argyle (Contact Author)

Brigham Young University - Department of Finance ( email )

United States

Taylor Nadauld

Brigham Young University ( email )

Provo, UT 84602
United States

Christopher Palmer

MIT Sloan ( email )

77 Massachusetts Avenue
Cambridge, MA 02139-4307
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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