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Subprime consumer credit demand: Evidence from a lender's pricing experiment

Alan, S and Loranth, G (2013) 'Subprime consumer credit demand: Evidence from a lender's pricing experiment.' Review of Financial Studies, 26 (9). 2353 - 2374. ISSN 0893-9454

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Abstract

Using a unique panel data set from a U.K. credit card company, we analyze the interest rate sensitivity of subprime credit card borrowers. In addition to all individual transactions and loan terms, we have access to details of a randomized interest rate experiment conducted by the lender on existing (inframarginal) loans. For the whole sample, we estimate a statistically significant £3.4 reduction in monthly credit demand in response to a five percentage point increase in interest rates. This aggregate response is small, but it masks very interesting heterogeneity in the sample. We find that only low-risk borrowers who fully utilize their credit cards lower their credit demand significantly when faced with an increase in interest rates. We also document that a five percentage point increase in interest rates generates significant additional revenue for the lender without inducing delinquency over a short horizon. © 2013 The Author.

Item Type: Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 16 Oct 2013 10:30
Last Modified: 30 Jan 2019 16:18
URI: http://repository.essex.ac.uk/id/eprint/8173

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