Monthly Payment Targeting and the Demand for Maturity

Bronson Argyle (), Taylor D. Nadauld and Christopher Palmer

No 25668, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we provide evidence of the importance of monthly payments in the market for consumer installment debt. Auto debt in particular has grown rapidly since the Great Recession and has eclipsed credit cards in total debt outstanding. Auto-loan maturities have also increased such that most auto-loan originations now have a term of over 72 months. We document three phenomena we jointly refer to as monthly payment targeting. First, using data from 500,000 used auto loans and discontinuities in contract terms offered by hundreds of lenders, we show that demand is more sensitive to maturity than interest rate, consistent with consumers managing payment size when making debt decisions. Second, many consumers appear to employ segregated mental accounts, spending exogenous payment savings on larger loans. Third, consumers bunch at round-number monthly payment amounts, consistent with the use of budgeting heuristics. These patterns hold in subsamples of constrained and unconstrained borrowers, challenging liquidity constraints as a complete explanation. Our estimates suggest that borrower focus on payment size, combined with credit-supply shocks to maturity, could significantly affect aggregate outstanding debt.

JEL-codes: D14 D15 D18 D91 E43 E51 E71 G02 G21 G41 H31 L62 M38 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-ban, nep-mac and nep-pay
Note: CF ME PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as Bronson S Argyle & Taylor D Nadauld & Christopher J Palmer & Itay Goldstein, 2020. "Monthly Payment Targeting and the Demand for Maturity," The Review of Financial Studies, vol 33(11), pages 5416-5462.

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