Monthly Payment Targeting and the Demand for Maturity

Bronson S Argyle, Taylor D Nadauld, Christopher J Palmer and Itay Goldstein

The Review of Financial Studies, 2020, vol. 33, issue 11, 5416-5462

Abstract: 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 to 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 heuristic budgeting. That these patterns hold in subsamples of likely constrained and unconstrained borrowers challenges liquidity constraints as a complete explanation.

JEL-codes: D15 E51 E71 G21 G41 G51 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (12)

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