Collateral Value and Strategic Default: Evidence from Auto Loans

Dimuthu Ratnadiwakara ()
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Dimuthu Ratnadiwakara: Louisiana State University

Journal of Financial Services Research, 2021, vol. 59, issue 3, No 3, 209-240

Abstract: Abstract I study the impact of changes to collateral value on borrowers’ default decisions on auto loans using two natural experiments in Sri Lanka. Changes in vehicle import tax rates and loan-to-value ratio caps on auto loans generated plausibly exogenous variation in the resale value of vehicles already pledged as collateral. Using proprietary auto loan performance data, I estimate that a 10% drop in the collateral value corresponds to a 44% increase in the default rate. I also find that collateral value is more important for borrowers with higher outstanding loan balances.

Keywords: Strategic default; Collateral value; Auto loans (search for similar items in EconPapers)
JEL-codes: D12 D14 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10693-021-00350-3

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