Consumer loans with fixed monthly payments: Information problems and solutions based on some Swedish experiences

Author: Yard S.

Source: The International Journal of Bank Marketing, Volume 22, Number 1, 2004 , pp. 65-80(16)

Publisher: Emerald Group Publishing Limited

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Abstract:

Consumers tend to have problems interpreting cost information, such as the annual percentage rate (APR), pertaining to loans. Students were used to test people's spontaneous estimates of loan cost when only the payment pattern was known, but not the APR or the total finance charge (FC). Experiments show that some absolute measures such as the FC seem to be used rather than relative measures when ranking loans. This leads to a bias against loans of longer duration. This can be avoided by using a heuristic, an approximate APR, by a simple development of the FC. The last section examines the problem of estimating the duration change when the interest rate is altered. Experiments show that the duration is generally underestimated when only the payment pattern and the interest rate are known. If the FC per month is known the situation improves somewhat, but still the effects on the duration of changing interest rates are underestimated.

Keywords: Loans; Consumer Credit; Cost Estimates; Sweden

Document Type: Research article

DOI: http://dx.doi.org/10.1108/02652320410514933

Publication date: 2004-01-01