Monthly Payment Targeting and the Demand for Maturity

Abstract

Abstract We document three phenomena we jointly refer to as monthly payment targeting. First, using data from 500,000 used auto loans and discontinuities in contract terms offered by hundreds of lenders, we show that demand is more sensitive to maturity than to interest rate, consistent with consumers managing payment size when making debt decisions. Second, many consumers appear to employ segregated mental accounts, spending exogenous payment savings on larger loans. Third, consumers bunch at round number monthly payment amounts, consistent with heuristic budgeting. That these patterns hold in subsamples of likely constrained and unconstrained borrowers challenges liquidity constraints as a complete explanation.