Study: Customers with auto loans on American-made cars more likely to default than on foreign vehicles

This one will make more than a few people scratch their heads: Researchers today said customers that take auto loans on "American cars should have significantly higher interest rates to compensate for higher default risk," than customers who buy Japanese or European cars. Loans secured for European cars and Japanese cars are 50% and 56%, respectively, less likely to default than loans on American cars. 

In a forthcoming book, Brent Ambrose, professor of real estate at The Pennsylvania State University’s Smeal College of Business, and his co-authors find that the probability that borrowers will default on their auto loans is affected by the type of car that is financed. The authors looked at the performance of 6,996 auto loans from January 1998 to March 2003. In addition to the probability of default being higher for American cars, their results show that loans on European cars are the least likely to be prepaid, followed by loans for Japanese makes.

These results may not be surprising since the average monthly auto payments for American consumers above $500 for the fourth straight month, according to a Morgan Stanley analysis of June consumer credit data from the Federal Reserve Board, but still.   

Some other interesting findings in the research include: 

  • Loans for European and Japanese cars had a lower default rate (2.9%) than loans for American cars (4.7%). 
  • Loans for GM Saturns had default hazards 22 times higher than the default hazard of Toyotas. 
  • Loans for Mazdas were six times more likely to default than loans for Toyotas
  • Purchasers of American cars were older (45 years versus 41 and 38 for purchasers of European and Japanese cars, respectively). 
  • Purchasers of American cars borrowed more relative to the purchase price (80% versus 65% and 76% for purchasers of European and Japanese cars, respectively). 
  • European car purchasers had higher monthly incomes on average ($4,625) than either American ($4,024) or Japanese ($4,114) car purchasers. 

The authors suggest that, just as insurance companies base rates on the make and model of the car being insured, banks should consider dropping their "house rates" for auto loans and adjust interest rates according the type of car being financed. In a presentation the researchers noted: For example, insurance premiums on Volvos are not necessarily lower than premiums on BMWs due to any discernable difference in car safety, but rather result from the clientele that purchase these cars. That is, the typical Volvo driver may be less aggressive, and thus less prone to accidents, on average, than the typical BMW driver.To balance for this higher risk, American automobile manufacturers must price their products higher, which implies that "cash purchasers of American cars are, in effect, subsidizing the poor credit performance of buyers who finance the purchase of American cars," the researchers said in a statement. "Asymmetric Information and the Automobile Loan Market" is a chapter in the forthcoming book Household Credit Usage: Personal Debt and Mortgages.  For more on the book, visit http://www.palgrave-usa.com/catalog/product.aspx?isbn=1403983925 online.  

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