Heterogeneous Sensitivities to Interest Rate Changes: Evidence from Consumer Loans

69 Pages Posted: 16 Aug 2017 Last revised: 7 Apr 2019

See all articles by Jacelly Cespedes

Jacelly Cespedes

University of Minnesota - Carlson School of Management

Date Written: February 2019

Abstract

I analyze the credit contract decisions made by borrowers and whether borrower choices can be used for screening. In the setting, the interest rate jumps at specific loan amount thresholds, which create incentives for bunching below the cutoffs. I find substantial heterogeneity in sensitivities to interest rate jumps. Evidence supports borrower sophistication as the main explanation for this heterogeneity. Furthermore, borrowers who fail to bunch below the thresholds are 18% more likely to default and 24% less likely to receive funding from institutional lenders. Findings suggest that borrowers’ suboptimal credit decisions can be used to reduce information asymmetries.

Keywords: credit markets, overpayment, sophistication, screening, fintech, peer-to-peer lending, consumer finance

JEL Classification: D14, D82, G23

Suggested Citation

Cespedes, Jacelly, Heterogeneous Sensitivities to Interest Rate Changes: Evidence from Consumer Loans (February 2019). Available at SSRN: https://ssrn.com/abstract=3022332 or http://dx.doi.org/10.2139/ssrn.3022332

Jacelly Cespedes (Contact Author)

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States

HOME PAGE: http://sites.google.com/site/jacellycespedes/

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