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Overcoming Information Asymmetries in Low-Income Lending: Lessons from the "Working Wheels" Program

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  • Jessica Holmes

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  • Jonathan Isham

    ()

  • Jessica Wasilewski

Abstract

This 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.

Suggested Citation

  • Jessica Holmes & Jonathan Isham & Jessica Wasilewski, 2002. "Overcoming Information Asymmetries in Low-Income Lending: Lessons from the "Working Wheels" Program," Middlebury College Working Paper Series 0244, Middlebury College, Department of Economics.
  • Handle: RePEc:mdl:mdlpap:0244
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    References listed on IDEAS

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    Cited by:

    1. Jessica A. Holmes & Jonathan T. Isham & Paul M. Sommers, 2007. "Is George Bailey Dead?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 3(1), pages 19-24, January.
    2. Jessica Holmes & Jonathan Isham & Ryan Petersen & Paul Sommers, 2005. "Does Relationship Lending Still Matter in the Consumer Banking Sector? Evidence from Two Financial Service Organizations in Vermont," Middlebury College Working Paper Series 0511, Middlebury College, Department of Economics.

    More about this item

    Keywords

    low-income lending; relationship lending; information asymmetries; automobile loans; credit-rationing;

    JEL classification:

    • 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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