Archive for November 29, 2015

CREDIT IN THE MARKET AND SPEEDY PAYDAY LOANS

November 29, 2015

automobile loanThe main goal of our paper can be described as estimating the elasticities of automobile loan demand with respect to interest rate and maturity, and testing the hypothesis that different population groups have different elasticities, with the group least likely to be liquidity constrained exhibiting higher interest rate elasticity, and zero maturity elasticity. Unlike Juster and Shay (1964), we do not rely on an experiment, but use data on individual car purchases and the loans associated with them. The simple model sketched in Section 2 constitutes the basis for the specification of the empirical equations we estimate below.

Using actual data on auto financing rather than responses to survey questions, poses, however, several challenges. First, credit constraints may affect the decision to purchase a car; consumers who do not enter the automobile market may do so because they do not wish to buy a car, or because they cannot obtain the necessary loan to finance the purchase. Second, the amount which is borrowed may depend on the size of the car that is bought which in turn may depend on the availability and cost of credit. Third, information on the loan terms facing the buyer, interest rate and maturity in particular, is available only for the subset of consumers who finance their purchase; the notional interest rate faced by those who do not finance is not observed (neither is the rate of return they earn on their savings). Fourth, consumers who finance 100% of their car, are also at a corner, even though the interest rate and the maturity of their loans are observed.11 Fifth, the interest rate and maturity of those who finance may be endogenous, since consumers generally choose the combinations of interest rates and maturities that best fit their needs. In addition, as documented below, different consumers may face different interest rates and maturities depending on how much they borrow, what type of car they buy (new vs. used), etc.. This implies that interest rates and maturities (as well as their interactions) should be treated as endogenous. We discuss these issues below.

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