A Puzzle in the Relation Between Risk and Pricing of Long-Term Auto Loans (WP-2020-03)

Abstract

Long-term auto loans have become increasingly popular in the past decade. After controlling for borrower and loan characteristics available from the credit bureau data and macroeconomic conditions, we find that auto loans with terms longer than five years have higher delinquency rates than shorter-term loans during each year in their lifetimes. However, the yield curve among auto loans is inverted after controlling for the loans’ delinquency and prepayment risks, and the interest rates on the long-term loans are lower than those justified by their higher delinquency risks. The reasons behind this puzzle deserve additional investigation in the future.

Authors

Zhengfeng Guo, Yan Zhang and Xinlei Zhao