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One Month Longer, One Month Later? Prepayments in the Auto Loan Market

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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 over 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 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.

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  • Bradley Katcher & Geng Li & Alvaro Mezza & Steve Ramos, 2024. "One Month Longer, One Month Later? Prepayments in the Auto Loan Market," Finance and Economics Discussion Series 2024-056, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2024-56
    DOI: 10.17016/FEDS.2024.056
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    Cited by:

    1. Elizabeth C. Klee & Adair Morse & Chaehee Shin, 2024. "Auto Finance in the Electric Vehicle Transition," Finance and Economics Discussion Series 2024-065, Board of Governors of the Federal Reserve System (U.S.).

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    More about this item

    Keywords

    Prepayment; Auto loan; Maturity choice; Household financial decisions; Term structure; Liquidity constraints;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy

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