Transparency in consumer credit. the usage of the APR
The role of Annual Percentage Rate (APR) in installment plan selection was investigated. The choice of analyzing APR was motivated by its wide diffusion due to the mandatory disclosure acts. There have been doubts towards consumer understanding of APR. A sample of 299 consumers were given five series of credit alternatives. The descriptions of the loans were homogeneous and regarded amount borrowed, duration, monthly installment, APR, total repayments, and opportunity cost of capital. Consumers were asked to select a credit option for each series clarifying the motivations of their choice. The ability to select the loan with the highest Net Present Value (NPV) was ascertained. It depends on the awareness of (i) opting for the lowest APR, that is also less than the opportunity cost of capital; and (ii) demanding the extension of the repayment period to improve the convenience of the identified competitive rate. The analysis attested consumer failure to single out the loan with the highest NPV. The reason should be a considerable lack of information about the usage of APR: participants selected the lowest rate but they neglected to consider the opportunity cost of capital and the extension of the repayment period. Furthermore, they sometimes chose the loan contrasting duration and monthly borrowing costs. APR usage may therefore be inapt since employed as a substitute for the monthly installment payment. An overlap between economic convenience and financial sustainability could explain this phenomenon. To improve disclosure, further (or different) borrowing cost measures should be placed in credit advertisements. This is one of the few studies that measure ability to select installments plans considering effects of information availability.
|Date of creation:||Jan 2010|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:37111. 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: (Joachim Winter)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.