When Financing Terms Are Generous, Car Buyers Pay More
When prospective buyers have access to longer-term loans with lower monthly payments, the transaction prices for automobiles increase.
The supply of auto loans, and the terms of these loans, play a central role in the auto market. The relationships between the behavior of lenders, auto dealers, and consumers are complex. In The Capitalization of Consumer Financing into Durable Goods Prices (NBER Working Paper No. 24699) Bronson Argyle, Taylor D. Nadauld, Christopher Palmer, and Ryan D. Pratt examine one aspect of this market. They test whether consumers pay more for used cars when they have access to loans that allow a longer time for repayment. All else constant, they find that a 12-month reduction in the term available for loan repayment is associated with about a 3 percent decline in the selling price for the car.
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The researchers recognize that the maturity of the auto loan that a potential buyer can access depends on many factors. For example, most lenders reduce the maturity of the loans they offer as the age of the car increases. However, many lenders reduce their maximum loan length offer at the beginning of the calendar year, resulting in different repayment requirements for otherwise identical cars purchased just a few weeks apart. A loan for a car in December may allow a 72-month maximum period for repayment, but a loan for the same car in early January may require repayment within 60 months. The researchers use this discontinuity in loan terms to compare prices paid by consumers who have access to loans of different maturities, even though they and the cars they are buying are otherwise similar. They find that borrowers pay about 3.6 percent less for their cars when the loan maturity they are offered declines by 12 months. Auto dealers are able to charge more when consumers
have access to more generous credit that lowers their monthly payment for a given purchase price.
— Morgan Foy
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