This research concerns the extension of consumer automobile loans by credit unions. The findings of the research are presented in two parts. In the first part, the specifics related to the extension of consumer automobile loans by credit unions are considered, while the second part considers how this process might be improved through the application of either the Markowitz (1959) mean variance model or the time state preference (TSP) model.
THE EXTENSION OF CONSUMER AUTOMOBILE LOANS BY CREDIT UNIONS
Specifically addressed in this discussion are (1) the evaluative structure for risk, (2) the evaluative structure for returns, and (3) the incorporation of risk and return factors into the decision making process. The primary risk factor considered by credit unions in the extension of consumer automobile loans is the credit worthiness of the loan applicant (Dublin, 1989). The past credit history of the applicant, the current structure of the applicant's financial obligations, the change to this structure which would be caused by approval of the requested consumer automobile loan, and the relationship of the revised applicant credit structure to applicant income are the principal factor considered in the evaluation of applicant credit worthiness. With respect to the collateral (automobile), most credit unions require between 10 percent and 25 percent down from the applicant, depending upon the evaluation of applicant credit worthiness, and the age of the collateral. Decisions on the approval or disapproval of automobile loans are made, in most credit unions, by a consumer loan committee composed of credit union officers and managers.
The return earned on consumer loans is critical for credit unions, as a federal interest rate maximum applies to consumer loans extended by federally chartered credit unions, which account for approximately three quarters of all credit unions in the country (Wolken and Navratil, 1981). Compet...