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

Abstract

Prior studies of interest rate differentials between nonprofit financial cooperatives (“credit unions”) and for-profit commercial banks generally find that credit unions offer lower loan rates and higher deposit rates. However, these studies likely suffer from selection bias since they rely on data at the level of the financial institution or branch which cannot account for demand-side (individual or household) or loan-level characteristics. We use household-level data from the Federal Reserve’s Survey of Consumer Finances from 2001 to 2016 to compare auto loan rates for households that borrow from credit unions, banks and other financial institutions (captive lenders and auto finance companies). This allows us to control for important household- and loan-level characteristics, such as income, net-worth, education, age, marital status, ethnicity, home ownership, employment status, credit card utilization, household debt, prior bankruptcies and delinquencies, and loan term and amount. We find that—after accounting for these household- and loan-level characteristics, and loan origination year fixed effects—households that receive auto loans from credit unions pay 0.77 percentage points less on interest rates for new vehicles—and 1.44 percentage points less on used vehicles—relative to households that receive auto loans from banks. The credit union-bank interest rate differential is generally smaller than naïve estimates using institution- and branch-level interest rate data but remains statistically significant and economically meaningful. We provide a back-of-the-envelope estimate of the aggregated savings to households that borrow from credit unions relative to banks and find that the savings from auto loans alone are larger than the entire value of the estimated credit union corporate income tax exemption. Therefore, we argue that credit unions charge lower auto loan rates due to both lower income taxes and their member-oriented objectives as nonprofit cooperatives. We argue that alternative explanations for lower auto loan rates at credit unions—such as the extent of indirect auto lending, auto refinancing, informational advantages, and cross-subsidization across loan products and services—are unlikely to explain the results.

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

JEL Classification: G21, G23