Relationships and Rationing in Consumer Loans: Evidence from the Nineties

Using a national survey data where the event of individual households being refused loans (credit rationed) by financial institutions -as well as the specific loans for which they were turned down -is observed directly, this study investigates both the role of relationships on credit rationing in the nineties and the differential role of relationships across credit rationing in various consumer loan types, like mortgage loans, auto loans, installment loans, credit card loans, and lines of credit. We find that even though relationship variables continue to be very important determinants of credit rationing in the consumer loan market in the nineties, their relative impact may have, in fact, declined compared to the eighties. We also find that relationships appear to be most important in decreasing the probability of rationing in mortgage loans, and play a relatively less important role in the rationing of car loans and installment loans. Credit cards and Lines of credit appear to be immune from relationship effects. Our work highlights the uniqueness of relationships in secured consumer loans like mortgage loans and its difference with secured loans in small business lending.