Abstract
This paper explores consumers’ repayment decisions and their time preferences. We do this through a hypothetical study using a stated-preference approach. In our experiment, participants are asked to make repayment decisions over time, under different loan sizes. We report five choice trajectories: minimum delay, monotonically decreasing, trajectory with one contradicting choice, trajectory with more than one contradicting choice, and maximum delay. These choice trajectories are taken into account in our modelling approach. Our analysis uses choice models that jointly estimate the discount rate and the probability of choice trajectories. Observed heterogeneity in repayment behaviour is further analysed using sociodemographic factors, and tested for the two loan sizes. We report heterogeneity in consumer repayment decisions, and what happens in the decision-making process for participants in different sociodemographic groups, for different loan sizes. These findings suggest that decision-makers can tailor their strategy for mitigating consumer debts by targeting different groups in the population demonstrating different choice behaviour and decision-making.
Highlights
An increasing variety of short-term loans have been offered to consumers in the United Kingdom (UK) in recent decades
To determine how repayment decisions vary across sociodemographic groups and treatments, the relative frequency of type of choice trajectory in Table 3 is compared
For participants who follow a monotonically decreasing choice trajectory, a significant effect is apparent between financial literacy on estimation of discount rate (Table 4a)
Summary
An increasing variety of short-term loans have been offered to consumers in the United Kingdom (UK) in recent decades. High-cost short-term credit–one type of short-term loan–has received considerable attention from people seeking a loan because of its accessibility (Financial Conduct Authority 2019). Expensive credit costs contribute to over-indebtedness (67% of payday loan borrowers) and low levels of confidence in managing personal finances (61% payday loan borrowers) (Financial Conduct Authority 2019). In 2018 consumers borrowed £1.3 billion, and repaid £2.1 billion–1.65 times the original loan value. While the amount of money borrowed has increased, there has been a drop in repayments from 2012; the gap between lending and repayment has increased from £0.4 billion in 2009 to £4.04 billion in 2018. Problems with financial credit products have implications not just for credit consumers, but for financial institutions which regulators have placed under increased scrutiny to control persistent, unmanageable, consumer debt
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
