One Month Longer, One Month Later? Prepayments in the Auto Loan Market

Bradley Katcher, Geng Li, Alvaro Mezza and Steve Ramos
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Alvaro Mezza: https://www.federalreserve.gov/econres/alvaro-mezza.htm

No 2024-056, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We document a secular trend of increasing auto loan maturity from 30 months to over 70 months during the past 50 years, partly reflecting improved vehicle durability. Analyzing over half of the auto loans originated during the past 16 years, we find that longer-maturity new car loans have significantly higher interest rates with a yield curve much steeper than comparable-maturity Treasury securities. In addition, we show that the majority of auto loans were prepaid, including loans of zero-interest, and that many prepaying borrowers could have paid less interest by choosing loans of a shorter maturity. We argue that factors such as liquidity constraints, uncertainty about future income, and monthly payment targeting likely account for only a portion of borrowers' choice of long-maturity loans.

Keywords: Prepayment; Auto loan; Maturity choice; Household financial decisions; Term structure; Liquidity constraints (search for similar items in EconPapers)
JEL-codes: D14 E43 G23 G41 G51 G53 (search for similar items in EconPapers)
Pages: 66 p.
Date: 2024-07-17
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2024-56

DOI: 10.17016/FEDS.2024.056

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