IDEAS home Printed from https://ideas.repec.org/a/eee/joepsy/v32y2011i4p621-631.html
   My bibliography  Save this article

Loan repayment plans as sequences of instalments

Author

Listed:
  • Hoelzl, Erik
  • Kamleitner, Bernadette
  • Kirchler, Erich

Abstract

Loan repayment can be viewed as a sequence of instalments. Instalments can either fall over time (i.e., repaying more in the beginning and less in the end), rise or stay constant. Three studies investigated whether the well-established preference for improvement (i.e., falling profiles) can also be observed in a loan context. Results show that consumers do prefer falling profiles over rising profiles; however, also a strong preference for constant profiles was found. These preferences for improvement and spreading even outweigh financial benefits. Consumers, hence, may sometimes opt for the financially worse loan option. Financial capability programs could benefit from including information about the perception of sequences.

Suggested Citation

  • Hoelzl, Erik & Kamleitner, Bernadette & Kirchler, Erich, 2011. "Loan repayment plans as sequences of instalments," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 621-631, August.
    • Handle: RePEc:eee:joepsy:v:32:y:2011:i:4:p:621-631
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0167487011000171
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Simonson, Itamar, 1989. "Choice Based on Reasons: The Case of Attraction and Compromise Effects," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 16(2), pages 158-174, September.
    2. Tokunaga, Howard, 1993. "The use and abuse of consumer credit: Application of psychological theory and research," Journal of Economic Psychology, Elsevier, vol. 14(2), pages 285-316, June.
    3. Ranyard, Rob & Hinkley, Lisa & Williamson, Janis & McHugh, Sandie, 2006. "The role of mental accounting in consumer credit decision processes," Journal of Economic Psychology, Elsevier, vol. 27(4), pages 571-588, August.
    4. Brown, Sarah & Taylor, Karl & Wheatley Price, Stephen, 2005. "Debt and distress: Evaluating the psychological cost of credit," Journal of Economic Psychology, Elsevier, vol. 26(5), pages 642-663, October.
    5. Matsumoto, Dawn & Peecher, Mark E. & Rich, Jay S., 2000. "Evaluations of Outcome Sequences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 83(2), pages 331-352, November.
    6. Chapman, Gretchen B., 1996. "Expectations and Preferences for Sequences of Health and Money," Organizational Behavior and Human Decision Processes, Elsevier, vol. 67(1), pages 59-75, July.
    7. Loewenstein, George F & Sicherman, Nachum, 1991. "Do Workers Prefer Increasing Wage Profiles?," Journal of Labor Economics, University of Chicago Press, vol. 9(1), pages 67-84, January.
    8. Annamaria Lusardi & Olivia S Mitchelli, 2007. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 42(1), pages 35-44, January.
    9. Frisch, Deborah, 1993. "Reasons for Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 399-429, April.
    10. Dilip Soman & Amar Cheema, 2002. "The Effect of Credit on Spending Decisions: The Role of the Credit Limit and Credibility," Marketing Science, INFORMS, vol. 21(1), pages 32-53, September.
    11. Annamaria Lusardi & Olivia Mitchell, 2006. "Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education Programs," Working Papers wp144, University of Michigan, Michigan Retirement Research Center.
    12. Guyse, Jeffery L. & Keller, L. Robin & Eppel, Thomas, 2002. "Valuing Environmental Outcomes: Preferences for Constant or Improving Sequences," Organizational Behavior and Human Decision Processes, Elsevier, vol. 87(2), pages 253-277, March.
    13. Sarah Brown & Gaia Garino & Karl Taylor & Stephen Wheatley Price, 2005. "Debt and Financial Expectations: An Individual- and Household-Level Analysis," Economic Inquiry, Western Economic Association International, vol. 43(1), pages 100-120, January.
    14. Overton, Annemarije A. & MacFadyen, Alan J., 1998. "Time discounting and the estimation of loan duration," Journal of Economic Psychology, Elsevier, vol. 19(5), pages 607-618, October.
    15. Angela Lyons & Mitchell Rachlis & Erik Scherpf, 2007. "What’s in a Score? Differences in Consumers’ Credit Knowledge Using OLS and Quantile Regressions," NFI Working Papers 2007-WP-01, Indiana State University, Scott College of Business, Networks Financial Institute.
    16. Lewis, Alan & van Venrooij, Marlies, 1995. "A note on the perceptions of loan duration and repayment," Journal of Economic Psychology, Elsevier, vol. 16(1), pages 161-168, March.
    17. Lowenstein, George & Prelec, Drazen, 1991. "Negative Time Preference," American Economic Review, American Economic Association, vol. 81(2), pages 347-352, May.
    18. Davies, Emma & Lea, Stephen E. G., 1995. "Student attitudes to student debt," Journal of Economic Psychology, Elsevier, vol. 16(4), pages 663-679, December.
    19. Adele Atkinson & Stephen McKay & Sharon Collard & Elaine Kempson, 2007. "Levels of Financial Capability in the UK," Public Money & Management, Taylor & Francis Journals, vol. 27(1), pages 29-36, February.
    20. Van Raaij, W. Fred & Gianotten, Henk J., 1990. "Consumer confidence, expenditure, saving, and credit," Journal of Economic Psychology, Elsevier, vol. 11(2), pages 269-290, June.
    21. Drazen Prelec & George Loewenstein, 1998. "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, INFORMS, vol. 17(1), pages 4-28.
    22. Sondra G. Beverly & Marianne A. Hilgert & Jeanne M. Hogarth, 2003. "Household financial management: the connection between knowledge and behavior," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Jul, pages 309-322.
    23. Hoelzl, Erik & Pollai, Maria & Kamleitner, Bernadette, 2009. "Experience, prediction and recollection of loan burden," Journal of Economic Psychology, Elsevier, vol. 30(3), pages 446-454, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sing, Tien Foo & Zou, Yiheng, 2022. "Mortgage payments and equity premium puzzle," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 376-388.
    2. Kashif Abbass & Abdul Aziz Khan Niazi & Abdul Basit & Tehmina Fiaz Qazi & Huaming Song & Halima Begum, 2021. "Uncovering Effects of Hot Potatoes in Banking System: Arresting Die-Hard Issues," SAGE Open, , vol. 11(4), pages 21582440211, December.
    3. Terence J. McElvaney & Peter D. Lunn & Féidhlim P. McGowan, 2018. "Do Consumers Understand PCP Car Finance? An Experimental Investigation," Journal of Consumer Policy, Springer, vol. 41(3), pages 229-255, September.
    4. Linda Dezső & Barna Bakó & Gábor Neszveda, 2022. "Exploiting context-dependent preferences to protect borrowers," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 27(4), pages 291-305, December.
    5. Rambaud, Salvador Cruz & Pascual, Joaquín López & de los Ángeles del Pino Álvarez, María, 2019. "Preferences over sequences of payments: A new validation of the q-exponential discounting," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 515(C), pages 332-345.
    6. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
    7. Dang, Le Phuong Xuan & Hoang, Viet-Ngu & Nghiem, Son Hong & Wilson, Clevo, 2023. "Social networks with organisational resource, generalised trust and informal loans: Evidence from rural Vietnam," Economic Analysis and Policy, Elsevier, vol. 77(C), pages 388-402.
    8. Duxbury, Darren & Summers, Barbara & Hudson, Robert & Keasey, Kevin, 2013. "How people evaluate defined contribution, annuity-based pension arrangements: A behavioral exploration," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 256-269.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Mewse, Avril J. & Lea, Stephen E.G. & Wrapson, Wendy, 2010. "First steps out of debt: Attitudes and social identity as predictors of contact by debtors with creditors," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 1021-1034, December.
    2. Lu Fan, 2021. "A Conceptual Framework of Financial Advice-Seeking and Short- and Long-Term Financial Behaviors: An Age Comparison," Journal of Family and Economic Issues, Springer, vol. 42(1), pages 90-112, March.
    3. Duffy, Sean & Smith, John & Woods, Kristin, 2015. "How does the preference for increasing payments depend on the size and source of the payments?," MPRA Paper 64212, University Library of Munich, Germany.
    4. Paola Manzini & Marco Mariotti & Luigi Mittone, 2010. "Choosing monetary sequences: theory and experimental evidence," Theory and Decision, Springer, vol. 69(3), pages 327-354, September.
    5. Stefano Cosma & Francesco Pattarin, 2012. "Attitudes, personality factors and household debt decisions: A study of consumer credit," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 12021, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    6. Yiing Jia Loke, 2017. "Financial Vulnerability of Working Adults in Malaysia," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 11(2), June.
    7. Erik Hoelzl & Luise Hahn & Maria Pollai & Jan Masak, 2013. "The Effect of Feedback on Process and Outcome of Loan Negotiations: Consequences on Risk Aversion and the Willingness to Compromise," Group Decision and Negotiation, Springer, vol. 22(3), pages 541-559, May.
    8. Daniel Read & Christopher Y. Olivola & David J. Hardisty, 2017. "The Value of Nothing: Asymmetric Attention to Opportunity Costs Drives Intertemporal Decision Making," Management Science, INFORMS, vol. 63(12), pages 4277-4297, December.
    9. Hoelzl, Erik & Pollai, Maria & Kamleitner, Bernadette, 2009. "Experience, prediction and recollection of loan burden," Journal of Economic Psychology, Elsevier, vol. 30(3), pages 446-454, June.
    10. Duxbury, Darren & Summers, Barbara & Hudson, Robert & Keasey, Kevin, 2013. "How people evaluate defined contribution, annuity-based pension arrangements: A behavioral exploration," Journal of Economic Psychology, Elsevier, vol. 34(C), pages 256-269.
    11. Jeffery L. Guyse & Jay Simon, 2011. "Consistency Among Elicitation Techniques for Intertemporal Choice: A Within-Subjects Investigation of the Anomalies," Decision Analysis, INFORMS, vol. 8(3), pages 233-246, September.
    12. Gerhard, Patrick & Gladstone, Joe J. & Hoffmann, Arvid O.I., 2018. "Psychological characteristics and household savings behavior: The importance of accounting for latent heterogeneity," Journal of Economic Behavior & Organization, Elsevier, vol. 148(C), pages 66-82.
    13. Marinos Stefanitsis & Irene Fafaliou & Joseph Hassid, 2013. "Similarities and Differences between Households’ and SME’s Financial Knowledge and Behaviour: A Greek Survey," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 63(1-2), pages 7-30, June.
    14. Rambaud, Salvador Cruz & Pascual, Joaquín López & de los Ángeles del Pino Álvarez, María, 2019. "Preferences over sequences of payments: A new validation of the q-exponential discounting," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 515(C), pages 332-345.
    15. Jeffery L. Guyse & L. Robin Keller & Candice H. Huynh, 2020. "Valuing Sequences of Lives Lost or Saved Over Time: Preference for Uniform Sequences," Decision Analysis, INFORMS, vol. 17(1), pages 24-38, March.
    16. Stefano Cosma & Francesco Pattarin, 2012. "Attitudes, personality factors and household debt decisions: A study of consumer credit," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0031, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    17. Schulz, Fabian & Schlereth, Christian & Mazar, Nina & Skiera, Bernd, 2015. "Advance payment systems: Paying too much today and being satisfied tomorrow," International Journal of Research in Marketing, Elsevier, vol. 32(3), pages 238-250.
    18. Annamaria Lusardi & Olivia S. Mitchell, 2008. "Planning and Financial Literacy: How Do Women Fare?," American Economic Review, American Economic Association, vol. 98(2), pages 413-417, May.
    19. Florian Deuflhard & Dimitris Georgarakos & Roman Inderst, 2019. "Financial Literacy and Savings Account Returns," Journal of the European Economic Association, European Economic Association, vol. 17(1), pages 131-164.
    20. Lusardi, Annamaria & Mitchell, Olivia S., 2011. "Financial literacy and retirement planning in the United States," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(4), pages 509-525, October.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joepsy:v:32:y:2011:i:4:p:621-631. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/joep .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.