What Explains the Post–2011 Trends of Longer Maturities and Rising Default Rates on Auto Loans?

46 Pages Posted: 29 Apr 2020

See all articles by Paul S. Calem

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Chellappan Ramasamy

affiliation not provided to SSRN

Jenna Wang

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: April, 2020

Abstract

This paper quantifies relationships of long-term auto borrowing and auto-loan default to observable borrower characteristics and economic variables. We also quantify the residual components of the trends in long-term borrowing and delinquency not attributable to identifiable factors. Second, our paper provides new evidence on the relationship between longer-term borrowing and auto-loan default risk. We find that observable factors associated with the choice of a long loan term usually indicate an increased risk of default. We also find that the increasing share of long-term loans and the rising frequency of auto-loan default are mostly attributable by nonspecific, year-of-origination (fixed) effects rather than factors observable from our data or observable to lenders. Moreover, although borrowers opting for long loan terms are more likely to default in most comparisons, the increasing share of borrowers selecting a long loan term between 2011 and 2016 did not materially contribute to the rise in default rates. Overall, our analysis highlights the role of unobserved borrower characteristics in driving the recent trends in long-term borrowing and default.

Keywords: longer-term borrowings, census tract, observable characteristics, default risk, mortgage, unemployment, student loans, household debt, auto lenders, credit cards, longer maturities, HELOC, origination vintages, auto loans

JEL Classification: C23, G21, D12

Suggested Citation

Calem, Paul S. and Ramasamy, Chellappan and Wang, Jenna, What Explains the Post–2011 Trends of Longer Maturities and Rising Default Rates on Auto Loans? (April, 2020). Available at SSRN: https://ssrn.com/abstract=3587385 or http://dx.doi.org/10.21799/frbp.dp.2020.02

Paul S. Calem (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Chellappan Ramasamy

affiliation not provided to SSRN

No Address Available

Jenna Wang

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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