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Credit repayment decisions

Author

Listed:
  • Sandie McHugh
  • Rob Ranyard

Abstract

Purpose - Information concerning the long‐term consequences of credit repayment decisions is often not available for flexible credit facilities such as credit cards. The purpose of this paper is to investigate the role of such information in repayment decisions. A dual mental accounting model of money management predicted that repayments would be influenced by both total cost and loan duration information. Experiment 2 also investigated the role of key economic and psychological factors, including some related to a risk defusing operator model of risk management. Design/methodology/approach - In two questionnaire‐based experiments bank customers (n=241; 300) were presented with credit card and remortgage repayment scenarios. In both studies, total cost and loan duration information were varied in a 2×2 randomised‐groups factorial design. Findings - In both studies, analysis of covariance showed that information on the long‐term consequences of repayment decisions lead to significantly higher levels of repayment. However, in Experiment 2, it was found using hierarchical multiple regression that disposable income, level of education, and the perception of, and worry about, repayment difficulties had larger significant effects on repayment levels. Research limitations/implications - The effects of long‐term consequence information were interpreted in terms of mental accounting and future‐oriented thinking. The effect of concern with future repayment difficulties suggests that borrowers choose lower repayments to control such risks. Practical implications - Providing total cost and loan duration information for a range of repayment levels could help borrowers make better repayment decisions. Originality/value - These novel findings contribute to our understanding of borrowers’ repayment behaviour.

Suggested Citation

  • Sandie McHugh & Rob Ranyard, 2012. "Credit repayment decisions," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 4(2), pages 98-112, November.
    • Handle: RePEc:eme:rbfpps:v:4:y:2012:i:2:p:98-112
    DOI: 10.1108/19405971211284880
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    Citations

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    Cited by:

    1. 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.
    2. McHugh, Sandie & Ranyard, Rob, 2016. "Consumers’ credit card repayment decisions: The role of higher anchors and future repayment concern," Journal of Economic Psychology, Elsevier, vol. 52(C), pages 102-114.
    3. Holzmeister, Felix & Huber, Jürgen & Kirchler, Michael & Schwaiger, Rene, 2022. "Nudging debtors to pay their debt: Two randomized controlled trials," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 535-551.
    4. Rob Ranyard & Sandie McHugh, 2012. "Bounded rationality in credit consumers' payment protection insurance decisions: the effect of relative cost and level of cover," Journal of Risk Research, Taylor & Francis Journals, vol. 15(8), pages 937-950, September.

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