Financial Institution Objectives & Auto Loan Pricing: Evidence from the Survey of Consumer Finances

Abstract

Prior studies of interest rate differentials between credit unions and commercial banks suffer from selection bias since they rely on data at the level of the financial institution or branch which cannot account for demand-side or loan-level characteristics. We improve on these studies by using household- and loan-level data from the Federal Reserve’s Survey of Consumer Finances from 2001 to 2019. We find that, on average, households that receive auto loans from credit unions pay 0.70 percentage points less on interest rates for new vehicles—and 1.40 percentage points less on used vehicles—relative to observably similar households that receive auto loans from banks. The aggregated savings to credit union members is larger than the estimated value of the credit union corporate income tax exemption. Nonetheless, the benefit from lower auto loan rates is likely an underestimate of the true value to consumers of credit unions’ presence in the market.

Keywords: Credit unions; banks; automobile loans; household finance; interest rates

JEL Classification: G21, G23