On the Convergence of Credit Risk in Current Consumer Automobile Loans

Loan seasoning and inefficient consumer interest rate refinance behavior are well-known for mortgages. Consumer automobile loans, which are collateralized loans on a rapidly depreciating asset, have attracted less attention, however. We derive a novel large-sample statistical hypothesis test suitable for loans sampled from asset-backed securities to populate a transition matrix between risk bands. We find all current risk bands eventually converge to a super-prime credit, despite remaining underwater. Economically, our results imply borrowers forwent $1,153-$2,327 in potential credit-based savings through delayed prepayment. We present an expected present value analysis to derive lender risk-adjusted profitability. Our results appear robust to COVID-19.