On the Convergence of Credit Risk in Current Consumer Automobile Loans

Jackson P. Lautier, Vladimir Pozdnyakov and Jun Yan

Papers from arXiv.org

Abstract: Loan seasoning and inefficient consumer interest rate refinance behavior are well-known for mortgages. Consumer automobile loans, which are collateralized loans on a rapidly depreciating asset, have attracted less attention, however. We derive a novel large-sample statistical hypothesis test suitable for loans sampled from asset-backed securities to populate a transition matrix between risk bands. We find all current risk bands eventually converge to a super-prime credit, despite remaining underwater. Economically, our results imply borrowers forwent \$1,153-\$2,327 in potential credit-based savings through delayed prepayment. We present an expected present value analysis to derive lender risk-adjusted profitability. Our results appear robust to COVID-19.

Date: 2022-11, Revised 2024-01
New Economics Papers: this item is included in nep-ban and nep-rmg
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