The Capitalization of Consumer Financing into Durable Goods Prices

A central question in the study of business cycles and credit is the relationship between asset prices and borrowing conditions. In this paper, we investigate the effects of cross-sectional credit-supply shocks on the prices of durable goods. Understanding how prices capitalize credit in the cross-section is important for understanding the incidence, transmission, and aggregation of credit-supply shocks. Using loan-level data on the prices paid for used cars by millions of borrowers and hundreds of auto-loan lenders, we measure what happens to individual-level prices when only some borrowers are exposed to an exogenous shock to the user cost of credit. Holding car quality fixed with a battery of age-make-model-trim by month fixed effects, we document that loan maturity is capitalized into the price treated borrowers pay for identical cars, attenuating the benefit of cheaper financing. For a car buyer with an annual discount rate less than 8.9%, the benefits of being offered cheaper credit are more than offset by the higher purchase price of the car. Overall, our estimates suggest that one additional year of loan maturity is worth 2.8% of the car’s purchase price, an implied elasticity of price with respect to monthly payment size of –0.23.