Loan Contracting in the Presence of Usury Limits: Evidence from the Auto Loan Market

We study the effects of usury limits on the market for auto loans and find little evidence of credit rationing. We show instead that loan contracting and the organization of the loan market adjust to facilitate loans to risky borrowers. When usury restrictions bind, auto dealers finance their customers' purchases and raise the vehicle sales price (and loan amount) relative to the value of the underlying collateral. By doing so, they arrange loans with similar monthly payments and compensate for credit risk through the mark-up on the product sale rather than the loan interest rate.