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Category: Data point

Subprime Auto Loan Outcomes by Lender Type

Borrowers with subprime auto loans typically pay high interest rates and frequently default on their loans. Interest payments could compensate lenders for borrowers’ default risk, and so the high interest rates paid by borrowers with subprime loans could be explained by their higher default rates. But interest rates can vary across consumers for a variety of other reasons, too. A focus of this report is on how much of the variation of interest rates among subprime loans can be explained by differences in default rates, and how much is left unexplained.

We find that differences in default rates could explain some of the average differences in interest rates across lender types, but cannot explain all of the average differences. These results mean that differences in default risk alone are unlikely to fully explain differences in interest rates charged by different types of auto lenders. We discuss many other reasons that interest rates could vary across lender types besides default risk. We present some preliminary evidence from our data on these reasons and suggest directions for future research.

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