Working Paper: NBER ID: w25668
Authors: Bronson Argyle; Taylor D. Nadauld; Christopher Palmer
Abstract: In this paper, we provide evidence of the importance of monthly payments in the market for consumer installment debt. Auto debt in particular has grown rapidly since the Great Recession and has eclipsed credit cards in total debt outstanding. Auto-loan maturities have also increased such that most auto-loan originations now have a term of over 72 months. We document three phenomena we jointly refer to as monthly payment targeting. First, using data from 500,000 used auto loans and discontinuities in contract terms offered by hundreds of lenders, we show that demand is more sensitive to maturity than interest rate, consistent with consumers managing payment size when making debt decisions. Second, many consumers appear to employ segregated mental accounts, spending exogenous payment savings on larger loans. Third, consumers bunch at round-number monthly payment amounts, consistent with the use of budgeting heuristics. These patterns hold in subsamples of constrained and unconstrained borrowers, challenging liquidity constraints as a complete explanation. Our estimates suggest that borrower focus on payment size, combined with credit-supply shocks to maturity, could significantly affect aggregate outstanding debt.
Keywords: monthly payments; consumer installment debt; auto loans; credit supply; household debt decisions
JEL Codes: D14; D15; D18; D91; E43; E51; E71; G02; G21; G41; H31; L62; M38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| demand for loan maturity is more elastic than demand for interest rates (E41) | consumers prioritize monthly payment size over total borrowing costs (G51) |
| favorable loan terms (G21) | consumers smooth their monthly payments (D15) |
| consumers smooth their monthly payments (D15) | consumers adjust their borrowing levels (G21) |
| significant bunching at round-number monthly payment amounts (G51) | consumers use budgeting heuristics (D12) |
| borrower focus on payment size + credit supply shocks to maturity (G51) | aggregate outstanding debt (H63) |
| exogenous shifts in the supply of credit (E51) | observed changes in loan terms (G21) |
| observed changes in loan terms (G21) | consumer preferences over loan characteristics (G51) |