Overcoming Information Asymmetries in Low-Income Lending: Lessons from the "Working Wheels" Program
AbstractThis study analyzes the role of relationship lending in the automobile credit market among a population generally perceived to be high risk - and thereby 'unlendable'. Using a unique dataset from the Vermont Development Credit Union's "Working Wheels" low-income car loan program, we find that the strength of the relationship between creditor and higher risk borrowers significantly raises the probability of loan approval, and that such borrowers who receive loans are relatively creditworthy. Specifically, for applicants without credit scores, we find that -- in addition to income and debt ratio -- age and the nature of the established relationship with the lender significantly affect the probability of loan approval. By contrast, for applicants with credit scores, only income, debt ratio and the credit score are the significant determinants. In addition, despite the greater information asymmetry associated with applicants whose credit histories are unknown, we find no significant difference in delinquency rates between those with and without credit scores. In the current climate of welfare reform, we conclude that policymakers should consider programs that encourage welfare recipients to establish relationships with traditional financial institutions and establish more programs like "Working Wheels" that facilitate access to affordable credit for automobiles.
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Bibliographic InfoPaper provided by Middlebury College, Department of Economics in its series Middlebury College Working Paper Series with number 0244.
Length: 38 pages
Date of creation: Oct 2002
Date of revision:
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low-income lending; relationship lending; information asymmetries; automobile loans; credit-rationing;
Other versions of this item:
- Jessica Holmes & Jonathan Isham & Jessica Wasilewski, 2005. "Overcoming Information Asymmetries in Low-Income Lending: Lessons from the “Working Wheels” Program," Southern Economic Journal, Southern Economic Association, vol. 72(2), pages 329â351, October.
- Jessica Holmes & Jonathan Isham & Jessica Wasilewski, 2004. "Overcoming Information Asymmetries in Low-Income Lending: Lessons from the 'Working Wheels' Program," Middlebury College Working Paper Series 0244r, Middlebury College, Department of Economics.
- H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
- I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs
- R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning
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