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Impact of financial education and transparency on borrowing decisions. the case of consumer credit

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  • Caratelli, Massimo
  • Ornella, Ricci

Abstract

Existing studies are not conclusive in favor of a strong relationship between the financial literacy and the ability to take better borrowing decisions. Results are quite heterogeneous and often point out the relevance of other factors, such as socio-demographic features or practical experience gained with daily use of financial products. The impact of (the amount and quality of) information available at the time of consumer choice is still unexplored. The objective of this paper is to fill in this literature gap and explore a large set of possible drivers of borrowing decisions in the consumer finance framework, with a specific focus on the transparency of price conditions. We interviewed a sample of 299 consumers. They were asked to select the best option between five series of credit alternatives. In order to explore the role of transparency, each series of loans was presented with three different sets of information, with an increasing level of detail. The ability to select the best alternative was measured calculating a score based on the Net Present Value criterion, and analysed as the dependent variable of a regression model with demographic, socioeconomic and financial characteristics as predictors. Our findings show that the amount and quality of available information strongly influence the choice. At the same time, an high level of education do not seem to play a significant role. Financial maturity results to positive influence the ability to select the best alternative and employed people perform better than non-working respondents.

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File URL: http://mpra.ub.uni-muenchen.de/37112/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 37112.

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Date of creation: Jan 2011
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Handle: RePEc:pra:mprapa:37112

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Keywords: Financial education; Transparency; Borrowing; Consumer credit; Decision making;

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