Friday, April 24, 2009

Nudging on car loan repayment!

Ian Ayres, via AOL Autos, draws attention to an article on a technology being used by some sub-prime auto loan issuers in the US, that provides for shutting off the engine if you default on payment of the loan instalment. Such devices are an excellent example of commitment contracts that nudge borrowers to making prompt payments.

The device, a product of telematics revolution (that blends telecommunications and wireless technologies), is controlled remotely by the dealer or lender and linked to the vehicle's powertrain. Before the deadline, the driver is treated to a concert of tones and flashing indicators signaling that the deadline is approaching. There are also warnings after the deadline has passed. Its proponents say the device is a win-win arrangement for everyone - dealers can sell cars to people who would have a hard time getting a loan otherwise, and buyers end up paying a somewhat lower interest rate because the risk to the lender is less. Further, the GPS device in the vehicle to facilitate re-possession, can double up as an anti-theft measure.

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