Monthly Payment Targeting and the Demand for Maturity

Abstract

for helpful comments. Tommy Brown, Sam Hughes, Ammon Lam, Tammy Lee, and Lei Ma provided excellent research assistance. An anonymous information-technology firm provided the data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w25668.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession

“…Borrowers who recently defaulted on their mortgage are likely to want liquidity and so a low-interest loan is likely to be attractive. Relatedly,Argyle et al (2017) have shown that there is strong consumer demand for extended maturity in the auto loan market.…”

The Capitalization of Consumer Financing into Durable Goods Prices

“…As offered maturity most frequently changes by 12 months, our estimates imply that the modal reduction in offered maturity reduces car prices in our sample by 3.6%, or roughly $720 on a $20,000 car. 3 While we also estimate the effect of interest rate variation on prices, our focus on maturity as a driver of prices differs from much of the previous literature, despite borrowers being more sensitive to the latter in practice (see, for example, Argyle et al, 2017a). Of course, lenders may change interest rates at the same time they change maturity policies, and we find this is responsible for some of our estimated impact of credit on prices.…”

“…Moreover, aggregate auto loan originations have increased substantially over our sample period, with outstanding auto debt in the U.S. increasing 56% between 2010 and 2017. Similar data are used in Argyle et al (2017aArgyle et al ( , 2017b.…”

“…Finally, we note the contribution of this paper relative to Argyle et al (2017a), which uses similar data but a different empirical strategy to document that consumers make debt decisions with monthly payment amounts as their primary consideration. In this paper, we explore the goods-pricing implications of monthly payment shocks, documenting that monthly payment shocks are capitalized into asset purchase prices in a way that, depending on borrower discount rates, offsets much of the value of easier credit.…”

“…Our results presented thus far have focused on the maturity dimension of the financing contract, motivated by evidence in Argyle et al (2017a) that constrained consumers have stronger preferences over maturity than over interest rates. However, given that maturities and interest rates frequently move together in a contract bundle, the empirical strategy discussed in Section 4 is subject to the concern that identified breaks in maturity policies may be coincident with breaks in lenders' interest rate policies.…”