Credit union loan rate determinants in the United States

ABSTRACT

Credit union participation in the consumer lending market continues to grow as an increasing number of consumers and small businesses become members and open accounts. This study investigates the determinants of credit union loan rates during a period of economic expansion in the United States using fourth quarter 2015 data for 5,942 credit unions. Five different interest rate categories are analysed using nine potential loan rate determinants. Results indicate that loan rates tend to be lower as credit union size increases, while high ratios for net charge-offs and operating costs cause interest rates to increase. Opposite to what is expected, loan rates are positively correlated with regional unemployment rates. A possible explanation for this outcome is that weak labour markets are associated with elevated loan delinquency rates and, therefore, greater default risks resulting in higher interest rates.

KEYWORDS:

• Credit unions
• consumer lending
• interest rates
• two staged least squares

JEL CLASSIFICATION:

• E43 - Interest Rates: DeterminationTerm Structure Effects
• G21 – BanksOther Depository InstitutionsMortgages
• M21- Business Economics
• L31 Nonprofit Institutions

Acknowledgments

Financial support for this research was provided by El Paso Water, City of El Paso Office of Management & Budget, National Science Foundation Grant DRL-1740695, TFCU, UTEP Center for the Study of Western Hemispheric Trade, and Hunt Institute for Global Competitiveness at UTEP. Helpful comments and suggestions were provided by Adam Walke, Robert Tokle, Aaron Sun, Rigoberto Delgado, Daniel Scheller, and an anonymous referee. Econometric research assistance was provided by Omar Solís.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Science Foundation [DRL-1740695]; City of El Paso Office of Management & Budget; El Paso Water; Hunt Institute for Global Competitiveness at UTEP; UTEP Center for the Study of Western Hemispheric Trade; TFCU.