Increased focus on repayment makes a loan less attractive

Author(s)

Linda Dezsö, Gábor Neszveda, B. Bakó, J. Steinhart, Erich Kirchler

Abstract

The Model of Focusing (Kőszegi & Szeidl, QJE 2013) implies that people prefer taking out a loan to an out-of-pocket payment. This model incorporates psychological findings on salience which imply that people focus on, and hence overweight, attributes in which their options differ more. Thus, the disadvantage of an upfront payment is over-weighted compared to the disadvantage of small and dispersed financing. In this paper we theoretically extend this framework to loan decisions where multiple repayment plans are available. After deriving testable propositions, we present results of a study with 235 participants on hypothetical loan decisions. We show that if the loan is offered in a decreasing-installment plan (that increases focus on repayment) in addition to a balanced fixed-installment plan, the latter becomes less attractive. Hence, people are less likely to take out the fixed-installment plan and, in turn, less likely to take out the loan at all. We argue that this is because the decreasing plan increases the focus on repayment and hence, dampens the focus on the large and concentrated benefit of the loan. We also show that a fixed-installment plan is rated as a greater burden when coupled with a decreasing-installment plan than when coupled with a slightly-decreasing installments plan which does not induce sufficient focus. We conclude that it is possible to decrease the decision-maker's focus on the great benefit of getting the loan if focusing on the repayment is increased at the same.

Organisation(s)

Department of Occupational, Economic and Social Psychology

Publication date

08-2014

Peer reviewed

Yes

Austrian Fields of Science 2012

501002 Applied psychology

Portal url

https://ucrisportal.univie.ac.at/en/publications/increased-focus-on-repayment-makes-a-loan-less-attractive(ba866026-0145-426e-b56d-95baac2b6c58).html