On the Convergence of Credit Risk in Current Consumer Automobile Loans

Loan seasoning and inefficient consumer interest rate refinance behavior are well-known for mortgages. Consumer automobile loans, which are collateralized loans on a rapidly depreciating asset, have attracted less attention, however. We derive a novel large-sample statistical hypothesis test suitable for loans sampled from asset-backed securities to populate a transition matrix between
risk bands. We find all current risk bands eventually converge to a super-prime credit, despite remaining underwater. Economically, our results imply borrowers forwent $1,153-$2,327 in potential credit-based savings through delayed prepayment. We present an expected present value analysis to derive lender risk-adjusted profitability. Our results appear robust to COVID-19.

Keywords: Adjustable premium loans, competing risks, consumer finance, Coronavirus, financial literacy, Reg AB II

JEL Classification: C58, D11, D12, G32, G51, G53

Suggested Citation: Suggested Citation

Lautier, Jackson and Pozdnyakov, Vladimir and Yan, Jun, On the Convergence of Credit Risk in Current Consumer Automobile Loans (January 9, 2024). Available at SSRN: https://ssrn.com/abstract=4278917 or http://dx.doi.org/10.2139/ssrn.4278917