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

Katcher, Bradley; Li, Geng; Mezza, Alvaro; Ramos, Steve

doi:10.17016/FEDS.2024.056

Working Paper

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

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.

Keywords: Prepayment; Auto loan; Maturity choice; Household financial decisions; Term structure; Liquidity constraints;

JEL Classification: D14; G51; E43; G41; G23; G53;

https://doi.org/10.17016/FEDS.2024.056