Repay As You Earn

This paper argues that households that face savings constraints prefer to tie the repayment frequency of a loan to their household income frequency. The study is based on repayment behavior of 691 rural Indian households and 738 loans.

The paper states that:

• If households are able to save, and the transaction cost is high, the optimal number of installments will tend to one per year;
• With low savings ability and a low transaction cost, repayment frequency will tend to income frequency.

The paper attempts to answer the following questions:

• What is an optimal repayment frequency?
• Is this affected by a household's savings opportunities and the cost of credit?
• Do households have preferences over repayment frequencies for a given loan?
• What factors determine these preferences?

The paper discusses:

• A simple model;
• The data used for the study;
• The empirical specification and identification strategy.

The paper finds that:

• The results of the study uphold its hypothesis;
• In general, income frequency increases the repayment frequency by 32%, however, controlling for savings, this effect reduces to less than 3%;
• In households that can save, the income frequency does not affect the repayment frequency per year;
• High transaction costs reduce the repayment frequency per year;
• Nuclear families have greater financial discipline and a higher probability of saving.