THE EFFECT OF RATE STRUCTURE UPON THE AVAILABILITY OF CREDIT AT CONSUMER FINANCE COMPANIES*

Abstract

s of Doctoral Dissertations 553 200 borrowers and 200 rejected applicants from each office were compared to determine whether Charleston lenders accepted more risk because of their greater rate-earnings protection. As a means of measuring risk, two credit-scoring systems were used-one based on consumer finance company data and the other on commercial bank experiences. The application of both scoring systems suggests there is virtually no difference between applicant personal characteristics in the two cities. An extended analysis of financial characteristics reveals applicants in Charleston have lower incomes and greater instalment debt and monthly payments, implying lenders in Charleston assume greater risks. This lower income and higher debt of applicants exists in spite of the higher income of the general population in Charleston as compared with Albany. It appears that borrowers in Charleston are eligible for approximately $400 more credit. The conclusiveness of the evidence is somewhat mitigated by the larger proportion of applicants living in owner-occupied dwellings and the greater residence stability of applicants in Albany. On balance, lenders in Charleston accept greater risk and offer more credit to their borrowers. The management attitude survey and both quantitative tests confirm the hypothesis of a positive relationship between finance charges and credit availability at consumer finance companies. This finding must be used in a guarded way, however, since the reliability and validity of the conclusions depend on the assumptions that (1) chargeoff rates measure risk acceptance standards, and (2) the independent and smaller finance companies adopt credit standards similar to those of the three major finance companies. Chargeoff rates presumably reflect credit quality, but in some instances collection and investigation expenses substitute for chargeoff expense, thereby rendering chargeoff rate a less valid measurement. Previous studies show the credit standards of smaller finance companies are simnilar to those of the larger firms, but further research is needed to confirm or refute this. This content downloaded from 207.46.13.111 on Tue, 09 Aug 2016 05:15:35 UTC All use subject to http://about.jstor.org/terms