Repayment Decisions Research Articles

The Effect of Self-Control on Loan Repayment Decisions of Women Market Vendors in Mbeya Municipality, Tanzania

Objective: This study aims to examine the effect of self-control on loan repayment decisions of women market vendors in Mbeya municipality, Tanzania. Design/Methods/Approach: This study employed a mixed research design. Primary data was collected via questionnaires and semi-structured interviews. A stratified random sampling technique was used to come up with a sample of 348 respondents selected from a population of 1741 women market vendors. Finally, descriptive statistics and regression analysis were utilized to process the collected data. Findings: The result of data analysis determined that self-control had a significant adverse effect on loan repayment decision Originality/Value: This study is unique since it studies self-control and loan repayment amongst women market vendors. The specificity of the set population allowed for a more in-depth and nuanced understanding of the experiences and challenges faced by this specific group of individuals hence deriving originality in this research. Practical/Policy implication: Findings are useful to policymakers and microcredit providers. Policymakers should promote activities and education that assist Tanzanians in attaining self-control. They should devise policies to make loans more affordable and easier to repay. Microcredit lenders should utilize subjective measures of self-control on loan applications as it is highly effective in enhancing repayment when coupled with high levels of financial literacy.

BEHAVIORAL BIASES AND CREDIT CARD REPAYMENTS AMONG MALAYSIANS

Analyses done using the survey response of 451 credit cardholders in the northern region of West Malaysia have shown that credit cardholder repayment pattern differed based on their demographic profile. Specifically, the study found that credit cardholders who were younger and earned a lower income tended to make poorer repayment decisions. In contrast, those with higher academic qualifications tended to make better repayment decisions. Further analyses also revealed that behavioral biases were better at predicting those who made full payment of the outstanding balance and those who paid more than the minimum amount, but failed to predict those who only paid the minimum amount or less. In addition, it was found that overspending emerged as the strongest predictor which discriminated among the three repayment groups, followed by risk aversion, myopia and impulsiveness.

What could possibly go wrong? Predictable misallocation in simple debt repayment experiments

How do borrowers repay their debts? In two simple debt repayment experiments, we elicit different types of severe deviations from optimal, i.e. debt minimizing, repayment decisions. We show how these deviations can be triggered using supposedly irrelevant information and find evidence for a novel heuristic, the “Cuckoo Fallacy”, which is based on the amount of new debt rather than the interest rate. We also demonstrate that simple framing can decrease repayment misallocation, nudging borrowers to more optimal behavior. Our results inform scholars and policy makers on how to improve household’s financial decisions.

Time to Repay or Time to Delay? The Effect of Having More Time before a Payday Loan Is Due

We examine the effect of state laws on minimum payday loan durations that give some borrowers an additional pay cycle to repay their initial loan with no other changes to contract terms. Neoclassical models predict this “grace period” would reduce borrowers’ need for costly loan rollovers. However, in reality, borrowers’ repayment behavior with grace periods is very similar to borrowers with shorter loans, merely pushed out a few weeks. Potential explanations include heuristic repayment decisions and naïve present focus. A calibrated model suggests that present-focused borrowers get less than one-half of the benefit from a grace period that time-consistent borrowers would. (JEL G23, G51)

Estimation of discrete choice network models with missing outcome data

This paper considers the problem of missing observations on the outcome variable in a discrete choice network model. The research question is motivated by an empirical study of the spillover effect of home mortgage delinquencies, where mortgage repayment decisions can only be observed for a sample of all the borrowers in the study region. We show that the nested pseudo-likelihood (NPL) algorithm can be readily modified to address this missing data problem. Monte Carlo simulations indicate that the proposed estimator works well in finite samples and ignoring this issue leads to a severe downward bias in the estimated spillover effect. We apply the proposed estimation procedure to study single-family residential mortgage delinquency decisions in Clark County of Nevada in 2010, and find strong evidence of the spillover effect. We also conduct some counterfactual experiments to illustrate the importance of consistently estimating the spillover effect in policy evaluation.

Exploring The Role of Information Disclosure in Influencing Credit Card User’s Repayment Decisions among Malaysians

Bound rationality theory is used to study the role of information disclosure in influencing credit card user’s repayment behaviour in Malaysian. Eight types of information disclosure analysed on the actual credit card users which divided into three prior define groups. Data collected by using the survey response of 413 card users in the northern region of West Malaysia. The finding of the discriminant analysis confirms that minimum payment due is the most contributing information disclosure which discriminant amongst the groups. Conditional on attributes of the data, quadratic discriminant analysis (QDA) outclassed the other discriminant analysis. QDA-resubstitution enable the credit card users to correctly classified repayment behaviour at 85 percent. Addition to that, for prediction purposes, 84 per cent of credit card users were correctly classified. The findings of this study highlight the importance of information disclosure in influencing credit card repayment decision. These findings have implications for policy maker, card users and issuers.

Measuring Time Preferences Using Stated Credit Repayment Choices

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.

Increasing microfinance risk tolerance through revenue sharing: an experiment

ABSTRACT Microfinance has been found to be less effective for high risk/return borrowing groups. We report a group liability microfinance lab experiment that tests a mechanism to raise repayment rates among such borrowers. The mechanism offers partial revenue sharing among groups of borrowers, agreed to before individual business outcomes are realized and loan repayment is due. Such revenue sharing makes loan repayment optimal under more outcome states, increasing the expected benefit to each borrower of repayment to qualify for future loans. We further test the effect of allowing borrowers to renege on revenue sharing agreements after learning their business outcomes, prior to loan repayment decisions. Our results illustrate the problem that exogenously higher risk/return borrowing groups achieve lower loan repayment rates than lower risk/return borrowing groups. We find evidence that optional revenue sharing significantly increases high risk borrowers’ repayment rates, but that most of this gain is lost if they can renege on revenue sharing agreements.

Information disclosure and credit card repayments: evidence from Malaysia

PurposeThis study analyzes the role of information disclosure in influencing credit card repayments by focusing on three intervention methods for improving repayment decisions among credit cardholders.Design/methodology/approachThis study uses the survey method to collect data. Four questionnaires are designed to identify which types of disclosure elicit better repayment decisions among credit cardholders. The participants were approached using the mall intercept method, and a total of 1,775 responses were obtained.FindingsEstimations using means comparison tests show that not providing minimum payment information improves repayments. The expected benefits are not delivered by the provision of higher minimum payment information or additional information that highlights the negative effects of making the minimum repayment only. Further analysis using logit estimation reconfirms the benefit of not providing minimum payment information. However, when such information is given, low minimum payment information elicits better repayment decisions than high minimum payment information or additional information. Repayment worsens under the additional information condition compared to the high minimum payment condition.Research limitations/implicationsThe findings of this study have a bearing on the decisions of policy makers, credit card issuers and consumers.Originality/valueThis paper clarifies the role of information in improving debt repayment decisions.

DETERMINANTS OF EFFECTIVENESS REPAYMENT APPS AT P2P LENDING PLATFORM DURING COVID 19 PANDEMIC IN INDONESIA

Abstract— The advance of technology development today brings an innovation in the financial industries all across the world, including in Indonesia. The financial technology continues to emerge from the sector of payment, investment and loans online or as we are familiar with the term P2P Lending platform. But, the growth of this business had a challenge when the Covid-19 Pandemic hit the country in the early 2020. The P2P lending platform experienced the first highest default rate due the difficulties of the SME’s as its major customers’ in repaying their loans. The purpose of this research is to analyze the determinants of effectiveness repayment apps for ultra-micro segment on P2P platform in Indonesia. As a quantitative research, primary data were collected through questionnaire answered by 133 respondents who were borrower of the P2P lending platform. The data collection was furthered processed statistically using Structural Equation Method (SEM). The study showed that the repayment decision had significantly influenced by perceived usefulness, perceived ease of use, perceived risk and information quality. Information quality itself had the highest influenced among others.
 
 Keywords: Perceived Usefulness; Perceived Ease of Use; Information Quality; Perceived Risks; Repayment Decision; Repayment Apps

Option value and auto title loans

A title loan is a short- term subprime loan secured by the title of the borrower’s automobile. Upon repayment, the title is retrieved from the lender and the borrower retains the vehicle. In the event of default the lender keeps the title and takes possession of the automobile but has no further recourse if the sale of the auto does not satisfy the outstanding debt. In this paper the borrower’s repayment decision is modeled as a call option with a strike price and option value dependent on loan size and term, interest rate, auto value at expiration and a variable that has not received adequate attention – vehicle quality. Given asymmetric information, the borrower is cognizant as to whether the auto is a peach, lemon or non-fruit and this significantly affects the option value and repayment decision. Under certain conditions the option value of repayment is zero and default may be the better decision even for the owner of a peach. The model is extended to compare the value of the repayment option to the payout of the residual value received from the lender after default. The incentives to rollover the loan are also discussed in terms of the call option value. Analyses are presented of the implications, within the context of the option model, of the use of the auto as collateral and also the likely outcomes for title lenders. Structuring the repayment decision as a call option allows those developing public policy to examine the impact of regulating interest rates, loan term, the loan to auto value ratio and the minimum residual factor.

Unsticking credit card repayments from the minimum: Advice, anchors and financial incentives

A significant proportion of credit card users persistently make the minimum repayment on their debt. Using an online experiment, we study how behavioral factors (advice, anchoring, and financial incentives) affect minimum debt repayment behavior. Our results show that although information interventions (advice and anchoring) have significant nudging effects on increasing repayments, the interventions that combine information with financial incentives have the largest effect, roughly doubling the information effects. Our results show that advising individuals to make a higher repayment and offering a financial incentive has a significant impact on individual debt repayment decisions, and can thus substantially reduce future debt burden.

Estimation of Spillover Effects in Home Mortgage Delinquencies with Sampled Loan Performance Data

This paper studies the spillover effect of home mortgage delinquencies using a discrete-choice spatial network model. In our empirical study, a main challenge in estimating this model is that mortgage repayment decisions can only be observed for a sample of all the borrowers in the study region. We show that the nested pseudolikelihood (NPL) algorithm can be readily modified to accommodate this missing data issue. Monte Carlo simulations indicate that the proposed estimator works well in finite samples and ignoring this issue leads to a downward bias in the estimated spillover effect. We estimate the model using data on single-family residential mortgage delinquencies in Clark County of Nevada in 2010, and find strong evidence of spillover effects. We also conduct some counterfactual experiments to illustrate the policy relevance of the spillover effect.

What Could Possibly Go Wrong? Predictable Misallocation in Simple Debt Repayment Experiments

How do people repay debt? In a simple debt repayment experiment we provide subjects with two credit cards with different interest rates and levels of debt that are to be repaid. From a rational choice perspective, this is arguably one of the simplest financial decisions. Nevertheless, we observe severe deviations from optimal, i.e. debt minimizing, repayment decisions with one particularly persistent type of misallocation that has not been found before. In consecutive experiments we show that this and further fallacies are predictable so that behavior can be steered towards more efficient repayment decisions.

The Round‐Number Advantage in Consumer Debt Payoff

The current consumer debt epidemic in the United States has prompted research on how consumers make debt repayment decisions. Consistent with past research indicating that psychological biases affect how consumers manage and prioritize debt accounts, we show that a characteristic of the number representing the debt amount impacts the speed of debt repayment. Across three field studies and three experiments, we provide evidence that people are likely to more quickly pay off round‐number debts (e.g., moderately‐sized debt amounts that end in the digits 0 or 5) than debts of similar magnitude that are not round numbers. Furthermore, we show that this effect arises because of the cognitive ease of round numbers, which manifests itself in processing fluency and retrieval fluency. In addition to documenting this round‐number advantage, we demonstrate the effectiveness of a simple and costless rounding intervention for helping consumers repay their debts more quickly.

Financial literacy, money management skill and credit card repayments

AbstractThis paper studies the relationship between socio‐economic factors, financial literacy, money management skill, overspending and impulsiveness on credit card repayment decisions. Analysis based on a sample of 451 credit card users in Malaysia showed that socio‐economic factors related to education, income, ethnicity, marital status and number of credit cards held influence credit card repayment decisions. Financial literacy and money management skill have a positive effect on credit cardholders’ decision making. Specifically, money management skill related to financial statements monitoring, prompt bill payment, spending within budget and handling money matters well influence credit card repayments. However, personality traits such as overspending and impulsiveness do not exert a significant effect on credit card payment behaviour. The findings of this study support the argument that financial education and behavioural intervention that inculcate good money management skill are important in shaping individuals’ behaviour.

The role of cognitive and personality characteristics in timely microcredit repayment: Evidence from a survey conducted by Provident, Mexico

Sustainability of microfinance institutions depends, among other factors, on having appropriate repayment levels. This article's contribution to the existing literature is the analysis of the role of a personality trait named "grit" in individual microcredit repayment decisions, alongside cognitive characteristics and time and risk preferences. This study is based on a survey of a sample of clients at 'Provident México', a formal microfinance institution that provides personal loans in vulnerable communities in Puebla, Mexico. We find evidence that, generally, older individuals possessing higher levels of grit and a tendency toward short term present bias are more likely to show no delays in loan repayments. Cognitive characteristics are inversely related to paying microcredits on time. Refinancing incentives does not play a key role in timely microcredit repayment, a result that is contrary to related literature but consistent with our finding that individuals in this sample that do not have delays in repayments are characterized by showing a short term present bias. El papel de las características cognitivas y de personalidad en el pago oportuno de microcréditos: Evidencia de una encuesta realizada por Provident, México.

Launching a Text Message Intervention to Assist Student Loan Borrowers with Repayment Decisions

Student loan debt has become a financial burden for many young adults in the United States. Previous research has found that many college student borrowers do not understand repayment terms and options. This multistate collaboration among Cooperative Extension Specialists sought to develop a way of supporting and informing recent college graduates on the process of student loan repayment. Text messaging was used as the intervention strategy. The purpose of this article is (i) to explain the process and methods of developing the student loan repayment text messaging campaign and (ii) present suggestions for someone interested in launching this type of intervention. Also, the article provides initial participation numbers across the nine land‐grant universities that were participants in the intervention.

Active Choice Format and Minimum Payment Warnings in Credit Card Repayment Decisions

The increasingly common online credit card repayment formats typically involve consumers’ active choice from among various payment amounts. Consumers rarely view minimum payment warning (MPW) disclosures while repaying online; therefore, the common shift toward online repayment means that the MPW is not salient for most credit cardholders. This article aims to shed light on credit cardholders’ payment decisions under this “active choice format” and explore effective online interfaces for payment decisions. Drawing on research in active choice, the authors demonstrate in three experiments that, compared with the “open format” used in traditional monthly statements, active choice format increases consumers’ full balance payment propensity and overall repayment amount, and this effect is even stronger when current account balance is included in the choice context. Furthermore, presence of the MPW disclosure significantly decreases payment of the minimum required amount and increases payment of the “three-year payoff amount.” Finally, presence of MPW increased consumer feelings about making the right decision, primarily for financially vulnerable people. These findings, based on hypothetical scenario choices, offer interesting theoretical and important policy implications.

Carrot or Stick? Evidence from a Pair of Randomized Field Experiments Testing Lender Information Sharing Hypotheses

Using two randomized field experiments, we examine how warning borrowers that their loan performance will be reported to a public credit registry affects their loan take-up and repayment decisions. We show that credit warnings increase loan take-up rates. The main drivers appear to be anticipation of reduction in incumbent lenders’ informational rents and improvement in access to informal or formal credit. Moreover, credit warnings reduce default rates by 3.7–5.9 percentage points. This reduction is comparable for borrowers who receive the credit warning before and after the loan take-up, which suggests that credit warnings have little net effect on borrowers’ credit-risk composition due to selection.