IDEAS home Printed from https://ideas.repec.org/a/kap/jcopol/v41y2018i3d10.1007_s10603-018-9380-5.html
   My bibliography  Save this article

Do Consumers Understand PCP Car Finance? An Experimental Investigation

Author

Listed:
  • Terence J. McElvaney

    (Economic and Social Research Institute (ESRI))

  • Peter D. Lunn

    () (Economic and Social Research Institute (ESRI)
    Trinity College Dublin)

  • Féidhlim P. McGowan

    (Economic and Social Research Institute (ESRI))

Abstract

Abstract Personal contract purchase (PCP) plans are innovative and increasingly popular forms of car finance. PCPs are inherently more complex than established financing options. The present study used experimental behavioural science to explore consumers’ comprehension of PCP plans and scope for beneficial interventions. Choice tasks, product rating tasks, and multiple choice comprehension questions were deployed to measure the consistency of decision-making and explicit comprehension of the product. Disclosures and advice were varied across conditions. A representative sample (n = 100) of consumers was initially given information on PCP deals as typically disclosed by car dealers. Results revealed that understanding was poor. One quarter of participants performed below chance on multiple-choice comprehension questions. Participants were prone to inconsistencies and objective mistakes when deciding between and rating offers. Disclosures designed to improve processing of mileage and cost information had ambiguous effects. Consumer advice sheets improved comprehension and reduced mistakes, with advice containing a diagram outperforming advice containing only text. The findings raise consumer protection concerns and support improved advice and stronger regulation.

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jcopol:v:41:y:2018:i:3:d:10.1007_s10603-018-9380-5
    DOI: 10.1007/s10603-018-9380-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10603-018-9380-5
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.

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

    Other versions of this item:

    References listed on IDEAS

    as
    1. Herbert A. Simon, 1955. "A Behavioral Model of Rational Choice," The Quarterly Journal of Economics, Oxford University Press, vol. 69(1), pages 99-118.
    2. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-309, May.
    3. Gourville, John T, 1998. " Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation," Journal of Consumer Research, Oxford University Press, vol. 24(4), pages 395-408, March.
    4. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
    5. 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.
    6. 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.
    7. Gathergood, John, 2012. "Self-control, financial literacy and consumer over-indebtedness," Journal of Economic Psychology, Elsevier, vol. 33(3), pages 590-602.
    8. repec:oup:rcorpf:v:4:y:2015:i:2:p:239-257. is not listed on IDEAS
    9. Chris M. Wilson & Catherine Waddams Price, 2010. "Do consumers switch to the best supplier?," Oxford Economic Papers, Oxford University Press, vol. 62(4), pages 647-668, October.
    10. David K. Levine & Drew Fudenberg, 2006. "A Dual-Self Model of Impulse Control," American Economic Review, American Economic Association, vol. 96(5), pages 1449-1476, December.
    11. 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.
    12. Lusardi, Annamaria & Tufano, Peter, 2015. "Debt literacy, financial experiences, and overindebtedness," Journal of Pension Economics and Finance, Cambridge University Press, vol. 14(4), pages 332-368, October.
    13. Michael D. Grubb, 2009. "Selling to Overconfident Consumers," American Economic Review, American Economic Association, vol. 99(5), pages 1770-1807, December.
    14. repec:oup:qjecon:v:132:y:2017:i:3:p:1319-1372. is not listed on IDEAS
    15. Drew Fudenberg & David K. Levine, 2006. "Superstition and Rational Learning," American Economic Review, American Economic Association, vol. 96(3), pages 630-651, June.
    16. Gathergood, John & Weber, Jörg, 2017. "Financial literacy, present bias and alternative mortgage products," Journal of Banking & Finance, Elsevier, vol. 78(C), pages 58-83.
    17. Loretta Garrison & Manoj Hastak & Jeanne M. Hogarth & Susan Kleimann & Alan S. Levy, 2012. "Designing Evidence-based Disclosures: A Case Study of Financial Privacy Notices," Journal of Consumer Affairs, Wiley Blackwell, vol. 46(2), pages 204-234, June.
    18. Sandie McHugh & Rob Ranyard, 2012. "Credit repayment decisions: The role of long-term consequence information, economic and psychological factors," Review of Behavioral Finance, Emerald Group Publishing, vol. 4(2), pages 98-112, November.
    19. Disney, Richard & Gathergood, John, 2013. "Financial literacy and consumer credit portfolios," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2246-2254.
    20. Ranyard, Rob & Craig, Gill, 1995. "Evaluating and budgeting with instalment credit: An interview study," Journal of Economic Psychology, Elsevier, vol. 16(3), pages 449-467, September.
    21. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
    22. Jacoby, Jacob, 1984. " Perspectives on Information Overload," Journal of Consumer Research, Oxford University Press, vol. 10(4), pages 432-435, March.
    23. Lunn, Pete & Bohacek, Marek & Rybicki, Alicia, 2016. "An Experimental Investigation of Personal Loan Choices," Research Series, Economic and Social Research Institute (ESRI), number BKMNEXT314.
    24. S. Dellavigna., 2011. "Psychology and Economics: Evidence from the Field," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 4.
    25. James M. Lacko & Janis K. Pappalardo, 2010. "The Failure and Promise of Mandated Consumer Mortgage Disclosures: Evidence from Qualitative Interviews and a Controlled Experiment with Mortgage Borrowers," American Economic Review, American Economic Association, vol. 100(2), pages 516-521, May.
    26. Homburg, Christian & Totzek, Dirk & Krämer, Melanie, 2014. "How price complexity takes its toll: The neglected role of a simplicity bias and fairness in price evaluations," Journal of Business Research, Elsevier, vol. 67(6), pages 1114-1122.
    27. Shane Frederick & George Loewenstein & Ted O'Donoghue, 2002. "Time Discounting and Time Preference: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 40(2), pages 351-401, June.
    28. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
    29. repec:kap:jcopol:v:40:y:2017:i:2:d:10.1007_s10603-016-9337-5 is not listed on IDEAS
    30. Shiv, Baba & Fedorikhin, Alexander, 1999. " Heart and Mind in Conflict: The Interplay of Affect and Cognition in Consumer Decision Making," Journal of Consumer Research, Oxford University Press, vol. 26(3), pages 278-292, December.
    31. McHugh, Sandie & Ranyard, Rob & Lewis, Alan, 2011. "Understanding and knowledge of credit cost and duration: Effects on credit judgements and decisions," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 609-620, August.
    Full references (including those not matched with items on IDEAS)

    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:kap:jcopol:v:41:y:2018:i:3:d:10.1007_s10603-018-9380-5. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Sonal Shukla) or (Springer Nature Abstracting and Indexing). General contact details of provider: http://www.springer.com .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.