Overcoming Information Asymmetries in Low-Income Lending: Lessons from the "Working Wheels" Program

Jessica Holmes (), Jonathan Isham () and Jessica Wasilewski

Middlebury College Working Paper Series from Middlebury College, Department of Economics

Abstract: This study analyzes the role of relationship lending in the automobile credit market among a population generally perceived to be high risk - and thereby 'unlendable'. Using a unique dataset from the Vermont Development Credit Union's "Working Wheels" low-income car loan program, we find that the strength of the relationship between creditor and higher risk borrowers significantly raises the probability of loan approval, and that such borrowers who receive loans are relatively creditworthy. Specifically, for applicants without credit scores, we find that -- in addition to income and debt ratio -- age and the nature of the established relationship with the lender significantly affect the probability of loan approval. By contrast, for applicants with credit scores, only income, debt ratio and the credit score are the significant determinants. In addition, despite the greater information asymmetry associated with applicants whose credit histories are unknown, we find no significant difference in delinquency rates between those with and without credit scores. In the current climate of welfare reform, we conclude that policymakers should consider programs that encourage welfare recipients to establish relationships with traditional financial institutions and establish more programs like "Working Wheels" that facilitate access to affordable credit for automobiles.

Keywords: low-income lending; relationship lending; information asymmetries; automobile loans; credit-rationing (search for similar items in EconPapers)
JEL-codes: H53 I38 R42 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2002-10
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Overcoming Information Asymmetries in Low-Income Lending: Lessons from the 'Working Wheels' Program (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:mdl:mdlpap:0244

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