A Quantitative Theory Of Installment Loans

Satyajit Chatterjee () and Nirvana Mitra

Working Papers from Centre for Advanced Financial Research and Learning (CAFRAL)

Abstract: We study a model of consumer debt where the only borrowing instruments are loan contracts with Equated Monthly Installments (EMIs). We calibrate the model to the contract particulars of loan-level administrative data from an Indian non-bank financial company. Indian households are infrequent borrowers and are more likely to stick to their payment schedule once they borrow. Our model accounts for most of these empirical regularities; it also finds a rationale for the ubiquitous presence of prepayment penalties in the EMI loan market. Pre-payment penalties mitigate the adverse selection of potential defaulters into the borrower pool by reducing incentives for the pre-payers to close a loan early, thereby improving welfare.

Keywords: EMI; defaults; heterogeneity; financial frictions (search for similar items in EconPapers)
JEL-codes: D14 D15 E44 G51 (search for similar items in EconPapers)
Pages: 20
Date: 2025-02
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Persistent link: https://EconPapers.repec.org/RePEc:ris:cafral:022268

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