Laurent Weill* (photo)
Professor of Economics and Finance
University of Strasbourg
Professor of Finance
IÉSEG School of Management
Professor of Finance
IÉSEG School of Management
*Faculty member of the Business Science Institute.
Article originally published on The Conversation France.
Should you apply for a loan in December rather than January? The question may seem incongruous since bankers' decisions are supposed to be made according to the borrower's situation and the characteristics of the project being financed, and should not take into account the month of the application.
But, this would be forgetting that bankers are also human beings: they tend to be influenced by their company's calendar and business policy.
When the banker's morale goes, everything goes
First, bankers may be subject to behavioral biases that influence their lending decisions. Numerous studies in behavioral finance have shown that investors in the stock market are subject to such biases. Their moods can generate timing anomalies.
For example, there is a "weekend effect", with higher stock returns on weekends. This could be explained by the depressed mood of returning to work on Monday compared to the good mood before the weekend.
Similarly, several studies have shown better stock market returns before the vacations or during religious vacations, which again can be explained by investors' good mood.
These behavioral biases of stock market investors can also be observed among bankers. Thus, periods associated with a better mood of bankers would be accompanied by an easier granting of loans.
Secondly, bankers may be financially motivated and want to meet the targets set by their superiors. This is the trade loading hypothesis observed in many economic sectors.
Focus on the end of the quarter
Trade loading is generally defined as the practice of offering discounts to customers at the end of the quarter to meet quarterly targets. In the case of banks, this means that in order to meet quarterly (or annual) targets, bankers have an incentive to increase loan volume in the last month of the quarter (especially the last quarter) to meet those targets.
The consequence would be easier lending in these periods.
At least that is what the graph below might suggest.
Change in the average consumer loan origination rate by month of the year.Peer-to-Peer Lending database, U.S.
This graph is from a study of consumer loans to individuals. It shows the acceptance rate for each month, i.e. the percentage of chances that each loan application has to be accepted.
We can clearly see that the months with the highest acceptance rates are, in ascending order, March, June, September and December, the months at the end of the quarter. Furthermore, December has the highest acceptance rate of the whole year (37% compared to March, for example, where we are at around 15%). This confirms the presence of trade loading.
It is also interesting to note that the same study shows a similar result with regard to borrowing rates. Indeed, they are cheaper at the end of the quarter, particularly in December.
December therefore seems to be the month with the highest acceptance rate at a lower rate.
Avoiding opportunistic behavior
If these results are true for individuals, what about companies? Can they also benefit from this trade loading effect?
A second study seems to confirm this. By analyzing the business loan market, this study shows that December is the month in which the chances of having a loan accepted are the greatest, regardless of the characteristics of the borrower and his or her project.
For business loans, the amount obtained by the firm is also higher at the end of the quarter and at the end of the year: the third month of each quarter is associated with a higher amount than the other two, while the fourth quarter remains associated with a higher amount than the previous three.
Bankers' incentives to meet their quarterly and annual targets lead them to adopt more favorable lending terms at these times of the year. For the same loan demand, banks would more readily agree to make a loan, charge a lower interest rate, and grant larger amounts at the end of each quarter and at the end of each year.
This result is rich in lessons for both borrowers and banks. Knowledge thus becomes an interesting negotiating lever for borrowers, whether individuals or companies.
Furthermore, the influence of factors unrelated to the quality of the file on loan acceptance can lead to poor lending decisions that can be costly for banks. They should therefore ensure that they correct the incentive mechanisms that favor trade loading.
Until then, apply for a loan in December rather than January.
Article translated from French with https://www.deepl.com/translator
Laurent Weill's articles on The Conversation France.
Maurice Thévenet's articles & books via CAIRN.Info.