Asymmetric information and the automobile loan market

Information revelation can occur through a variety of mechanisms. For example, corporate finance research has established that a firm’s dividend policies provide investors with information about future growth prospects.¹ In addition, research on residential mortgages indicates that borrowers reveal their expected tenure through their choice of mortgage contracts.² As a result, lenders offer a menu of mortgage interest rate and point combinations in an effort to learn about borrower potential mobility.³ Similarly, lenders may anticipate how consumer debt will perform by observing the consumption choices that are being financed. With the proliferation of risk-based pricing in credit markets, lender’s ability to further differentiate between borrower credit risks, based on consumer choice of goods, offers lenders a potentially important source to enhance profitability, as well as the potential to extend credit to a wider range of borrowers.⁴.