Dealer Financing in the Subprime Auto Market: Markups and Implicit Subsidies

American Finance Association Annual Meeting Paper

42 Pages Posted: 12 Aug 2021 Last revised: 20 Dec 2022

See all articles by Mark Jansen

Mark Jansen

University of Utah - Department of Finance

Samuel Kruger

University of Texas at Austin - Department of Finance

Gonzalo Maturana

Emory University - Goizueta Business School

Date Written: September 15, 2021

Abstract

Does dealership discretion to mark up interest rates hurt subprime auto borrowers? We use unique transaction-level data to examine finance and vehicle profits in the subprime auto market with three main results. First, financing subprime customers is costly for dealerships due to loan discounts that are only partially offset by proceeds from interest rate markups. Second, financing is costliest to dealers for deep subprime customers with low credit scores and low incomes. Third, instead of offsetting financing costs, vehicle markups are lowest for deep subprime customers. Finance margins and vehicle markups are also positively correlated more generally.

Keywords: subprime finance, auto lending, loan intermediation, price discrimination

JEL Classification: D12, D18, G23, G51

Suggested Citation

Jansen, Mark and Kruger, Samuel and Maturana, Gonzalo, Dealer Financing in the Subprime Auto Market: Markups and Implicit Subsidies (September 15, 2021). American Finance Association Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=3902847 or http://dx.doi.org/10.2139/ssrn.3902847

Mark Jansen (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
1655 Campus Center Dr.
Salt Lake City, UT 84112
United States
801-213-6910 (Phone)

HOME PAGE: http://eccles.utah.edu/team/mark-jansen/

Samuel Kruger

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Gonzalo Maturana

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

HOME PAGE: http://www.gonzalomaturana.com/

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