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People Choose Low Loan Repayments and High Interest Rates
Short term thinking leads to longer term, more expensive loans.
Why do consumers not minimize borrowing costs when taking out loans as traditional economic theory says they should? Using data on auto loans, Bronson Argyle and Taylor D. Nadauld of Brigham Young University and Christopher Palmer of MIT find that consumers are disproportionately willing to take on higher interest-rate loans to have lower monthly payments.
Borrowers appear to set targets for their monthly payment on rounded amounts like $200, $300, and $400, rather than choosing the most cost-efficient payments. When borrowers are offered cheaper loan terms, they are more likely to take out larger loans rather than pocket the savings.
The findings the authors observe run contrary to most standard models of consumer behavior and indicate that consumers use simple budgeting rules to choose loan repayments.
Auto debt has grown rapidly since the Great Recession and has surpassed 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.
About Ken Zino
Ken Zino, editor and publisher of AutoInformed, is a versatile auto industry participant with global experience spanning decades in print and broadcast journalism, as well as social media. He has automobile testing, marketing, public relations and communications experience. He is past president of The International Motor Press Assn, the Detroit Press Club, founding member and first President of the Automotive Press Assn. He is a member of APA, IMPA and the Midwest Automotive Press Assn. He also brings an historical perspective while citing their contemporary relevance of the work of legendary auto writers such as Ken Purdy, Jim Dunne or Jerry Flint, or writers such as Red Smith, Mark Twain, Thomas Jefferson – all to bring perspective to a chaotic automotive universe. Above all, decades after he first drove a car, Zino still revels in the sound of the exhaust as the throttle is blipped during a downshift and the driver’s rush that occurs when the entry, apex and exit points of a turn are smoothly and swiftly crossed. It’s the beginning of a perfect lap. AutoInformed has an editorial philosophy that loves transportation machines of all kinds while promoting critical thinking about the future use of cars and trucks. Zino builds AutoInformed from his background in automotive journalism starting at Hearst Publishing in New York City on Motor and MotorTech Magazines and car testing where he reviewed hundreds of vehicles in his decade-long stint as the Detroit Bureau Chief of Road & Track magazine. Zino has also worked in Europe, and Asia – now the largest automotive market in the world with China at its center.