Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment

Sule Alan and Gyongyi Loranth

The Review of Financial Studies, 2013, vol. 26, issue 9, 2353-2374

Abstract: Using a unique panel data set from a U.K. credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we have access to details of a randomized interest rate experiment conducted by the lender on existing (inframarginal) loans. For the whole sample, we estimate a statistically significant £3.4 reduction in monthly credit demand in response to a five percentage point increase in interest rates. This aggregate response is small, but it masks very interesting heterogeneity in the sample. We find that only low-risk borrowers who fully utilize their credit cards lower their credit demand significantly when faced with an increase in interest rates. We also document that a five percentage point increase in interest rates generates significant additional revenue for the lender without inducing delinquency over a short horizon. The Author 2013. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Date: 2013
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Related works:
Working Paper: Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment (2012)
Working Paper: Subprime Consumer Credit Demand: Evidence from a Lender?sPricing Experiment (2011)
Working Paper: Subprime consumer credit demand: evidence from a lender's pricing experiment (2011)
Working Paper: Subprime Consumer Credit Demand: Evidence from a Lender's Pricing Experiment (2011)
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