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A Quantitative Theory Of Installment Loans

Author

Listed:
  • Satyajit Chatterjee

    (Federal Reserve Bank of Philadelphia)

  • Nirvana Mitra

    (Centre for Advanced Financial Research and Learning (CAFRAL))

Abstract

We study a model of consumer debt where the only borrowing instruments are loan contracts with Equated Monthly Installments (EMIs). We calibrate the model to the contract particulars of loan-level administrative data from an Indian non-bank financial company. Indian households are infrequent borrowers and are more likely to stick to their payment schedule once they borrow. Our model accounts for most of these empirical regularities; it also finds a rationale for the ubiquitous presence of prepayment penalties in the EMI loan market. Pre-payment penalties mitigate the adverse selection of potential defaulters into the borrower pool by reducing incentives for the pre-payers to close a loan early, thereby improving welfare.

Suggested Citation

  • Satyajit Chatterjee & Nirvana Mitra, 2025. "A Quantitative Theory Of Installment Loans," Working Papers 022268, Centre for Advanced Financial Research and Learning (CAFRAL).
    • Handle: RePEc:ris:cafral:022268
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    File URL: https://www.cafral.org.in/sfControl/content/Speech/217202562705PMChatterjee_Mitra_Sept_2024.pdf
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    More about this item

    Keywords

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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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