How Does Bonus Payment Affect Auto Loan Demand and Delinquency?

Abstract

This article studies how receiving a bonus changes consumers’ demand for auto loans and their risk of future delinquency. Unlike traditional consumer products, auto loans have a long-term impact on consumers’ financial state because of the monthly payment obligation. Using a large consumer panel data set of credit and employment information, the authors find that receiving a bonus increases auto loan demand by 21%. These loans, however, are associated with higher risk, as the delinquency rate increases by 18.5%–31.4% depending on different measures. In contrast, an increase in consumers’ base salary will increase their demand for auto loans but not their delinquency. By comparing consumers with bonuses with those without bonuses, the authors find that bonus payments lead to both demand expansion and demand shifting on auto loans. The empirical findings help shed light on how consumers make financial decisions and have important implications for financial institutions on when demand for auto loans and the associated risk arise.