Making ‘Pay What You Can’ Work in Auto Finance

The debate behind this post boils down to this: Are people inherently good, or inherently bad?

There’s a lot of science that has delved into both options, but a recent economic study may ultimately illustrate that, when it comes to paying their fair share, people are good more often than not.

I first noticed the “pay what you can” retail strategy a few years back, when the band Radiohead released an album online and told people to pay what they wanted. It was an attempt to get around illegal piracy while also dodging iTunes, Rhapsody, and other legal online music sellers.

I was reminded of that when I saw the results of a study of a “pay what you can” restaurant in Austria. Only one of every 200 customers eats at the buffet restaurant and doesn’t pay. On average, customers pay five euros each when dining there, which more than covers the fixed costs of operating the restaurant.

What’s even more impressive is that the number of customers has risen more than 50% during the past two years as word caught on about the restaurant’s pricing strategy. It should be noted that the restaurant does charge a fixed price for drinks.

What would happen if auto lenders adopted a similar strategy? Would customers take a car and then not pay? Or would their guilty consciences get the best of them?

While the cynic in me is definitely more on the side that people are more likely to take advantage of a “pay what you can” pricing strategy (and what does that say about me?), could this work in auto finance? In theory, it’s not altogether different from an Option Adjustable-Rate Mortgage, where homeowners are presented with a number of payment options every month: Make a full principal and interest payment, pay just the interest, or make a minimum payment that doesn’t fully cover the accrued interest. The difference between a “pay what you can” and an Option ARM is that the Option ARM has been institutionalized.

It’s easy to pay five euros (or the American dollar equivalent) for a dinner. Paying $200 or $300 (or more) for a monthly car payment is a big bill. People might be more reluctant to part with that amount of cash and may be more willing to not pay their car payments. To work, perhaps the lender would have to institute a daily payment. Car owners would be required to make a daily payment, decreasing the amount paid while also making them more likely to go ahead and make a payment.

And this is one argument where I would relish being proven wrong.