Price Elasticity of Demand for Consumer Loans in Mexico

Price elasticity of consumer loans is a crucial factor in the decision making processes of financial institutions. Previous studies, employing varying levels of aggregation and units of observation, have consistently demonstrated a negative elasticity between personal loans and interest rates. In this study, we conduct an individual-level analysis in Mexico. Employing a local linear regression discontinuity design, we establish a significant negative effect on both the extensive margin, measured as a dichotomous variable indicating whether a customer accepts an offer or not, and the intensive margin, quantified by the loan amount taken. An addition to the existing literature on interest rate elasticity of consumer loans is the estimation of interest rate effects on different loan dimensions. Our findings reveal a significant negative impact on the loan term. Additionally, we estimate the effects on installment payments and find no statistically significant impact. These results indicate that consumers not only exhibit reduced willingness to accept credit at higher interest rates but also adjust their behavior to accommodate varying rates