Overcoming Information Asymmetries in Low-Income Lending: Lessons from the "Working Wheels" Program
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.
|Date of creation:||Oct 2002|
|Contact details of provider:|| |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hellmuth Milde & John G. Riley, 1988. "Signaling in Credit Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 103(1), pages 101-129.
- Paul M. Ong, 2002. "Car ownership and welfare-to-work," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 21(2), pages 239-252.
- Allan Schmid, A. & Robison, Lindon J., 1995.
"Applications of Social Capital Theory,"
Journal of Agricultural and Applied Economics,
Cambridge University Press, vol. 27(01), pages 59-66, July.
- Holzer Harry J. & Ihlanfeldt Keith R. & Sjoquist David L., 1994. "Work, Search, and Travel among White and Black Youth," Journal of Urban Economics, Elsevier, vol. 35(3), pages 320-345, May.
- Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
- Robert B. Avery & Raphael W. Bostic & Paul S. Calem & Glenn B. Canner, 1996. "Credit risk, credit scoring, and the performance of home mortgages," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 621-648.
- Stephen D. Williamson, 1987.
"Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 102(1), pages 135-145.
- Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
- Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, vol. 40(1), pages 3-14, January.
- O'Regan, Katherine M. & Quigley, John M., 1998.
"Accessibility and Economic Opportunity,"
Berkeley Program on Housing and Urban Policy, Working Paper Series
qt94s780fq, Berkeley Program on Housing and Urban Policy.
- John M. Quigley & Katherine M. O'Regan, 1998. "Accessibility and Economic Opportunity," Yale School of Management Working Papers ysm100, Yale School of Management.
- O'Regan, Katherine M. & Quigley, John M., 1997. "Accessibility and Economic Opportunity," University of California Transportation Center, Working Papers qt37h6t700, University of California Transportation Center.
- Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
- Steven Raphael & Lorien Rice, 2000.
"Car Ownership, Employment, and Earnings,"
JCPR Working Papers
179, Northwestern University/University of Chicago Joint Center for Poverty Research.
- Paul Ong & Evelyn Blumenberg, 1998. "Job Access, Commute and Travel Burden among Welfare Recipients," Urban Studies, Urban Studies Journal Limited, vol. 35(1), pages 77-93, January.
- Leonard I. Nakamura, 1993. "Recent research in commercial banking: information and lending," Working Papers 93-24, Federal Reserve Bank of Philadelphia.
- Blackwell, David W & Winters, Drew B, 1997. "Banking Relationships and the Effect of Monitoring on Loan Pricing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(2), pages 275-289, Summer.
- Allen N. Berger & Gregory F. Udell, 2001.
"Small business credit availability and relationship lending: the importance of bank organizational structure,"
Finance and Economics Discussion Series
2001-36, Board of Governors of the Federal Reserve System (U.S.).
- Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages 32-53, February.
- Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March.
- Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
- Loretta J. Mester, 1997. "What's the point of credit scoring?," Business Review, Federal Reserve Bank of Philadelphia, issue Sep, pages 3-16.
- Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
- Dwight M. Jaffee & Thomas Russell, 1984. "Imperfect Information, Uncertainty, and Credit Rationing: A Reply," The Quarterly Journal of Economics, Oxford University Press, vol. 99(4), pages 869-872.
- Cole, Rebel A., 1998. "The importance of relationships to the availability of credit," Journal of Banking & Finance, Elsevier, vol. 22(6-8), pages 959-977, August.
- Perraudin, William R M & Sorensen, Bent E, 1992. "The Credit-Constrained Consumer: An Empirical Study of Demand and Supply in the Loan Market," Journal of Business & Economic Statistics, American Statistical Association, vol. 10(2), pages 179-192, April.
- Marcelo Siles & Steven D. Hanson & Lindon J. Robison, 1994. "Socio-Economics and the Probability of Loan Approval," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 16(3), pages 363-372.
- Chakravarty, Sugato & Scott, James S, 1999. "Relationships and Rationing in Consumer Loans," The Journal of Business, University of Chicago Press, vol. 72(4), pages 523-544, October.
When requesting a correction, please mention this item's handle: RePEc:mdl:mdlpap:0244. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Vijaya Wunnava)
If references are entirely missing, you can add them using this form.