Risk-based pricing of interest rates in household loan markets
By: Wendy Edelberg.
Series: Finance and economics discussion series ;; 2003-62; Finance and economics discussion series (Online) ;; 2003-62.
Publisher: Federal Reserve Board
Published: 2003
Place of publication: Washington, D.C
Language: eng
Format: Electronic resource
Description: "Focusing on observable default risk's role in loan terms and the subsequent consequences for household behavior, this paper shows that lenders increasingly used risk-based pricing of interest rates in consumer loan markets during the mid-1990s.  It tests three resulting predictions.  First, the premium paid per unit of risk should have increased over this period.  Second, debt levels should react accordingly.  Third, fewer high-risk households should be denied credit, further contributing to the interest rate spread between the highest- and lowest-risk borrowers.  For those obtaining loans, the premium paid per unit of risk did indeed become significantly larger over this time period.  For example, given a 0.01 increase in the probability of bankruptcy, the corresponding interest rate increase tripled for first mortgages, doubled for automobile loans and rose nearly six times for second mortgages.  Additionally, changes in borrowing levels and debt access reflected these new pricing practices, particularly for secured debt.  Borrowing increased most for the low-risk households who saw their relative borrowing costs fall.  Furthermore, while credit access increased for very high-risk households, the increases in their risk premiums implied that their borrowing as a whole either rose less or, sometimes, fell"--Federal Reserve Board web site.
Notes: Also available in print.
Includes bibliographical references.
Title from PDF file as viewed on 7/20/2004.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.