Finance and Economics Discussion Series (FEDS)
July 2024
One Month Longer, One Month Later? Prepayments in the Auto Loan Market
Bradley Katcher, Geng Li, Alvaro Mezza, and Steve Ramos
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 more than 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 materially 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
DOI: https://doi.org/10.17016/FEDS.2024.056
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.