Abstract: How do inaccurate priors about the distribution of interest rates affect search and outcomes in consumer credit markets? In collaboration with Chile's financial regulator, we conducted a randomized controlled trial with 112,063 loan seekers where we showed treated participants a price comparison tool that we built using administrative data on the universe of consumer loans merged with borrower characteristics. The tool shows loan seekers a conditional distribution of interest rates based on similar loans obtained recently by similar borrowers. We find that consumers thought interest rates were lower than they actually were, and the price comparison tool caused them to increase their expectations about the interest rate they would obtain by 56%. Consumers also underestimated price dispersion, and our price comparison tool caused them to increase their estimates of dispersion by 69%. The price comparison tool did not cause people to search or apply at more institutions, but it did cause them to be 28% more likely to negotiate with their lender, to receive 13% more offers and 11% lower interest rates, and to be 5% more likely to take out a loan. We also cross-randomized whether we asked participants their priors about the distribution of interest rates, and find that merely asking these questions led them to search at 4% more institutions and obtain 9% lower interest rates.
Discussant: Bronson Argyle, Brigham Young University
Tianyu Han, Hong Kong University of Science & Technology
Xiao Yin, University College London
Abstract: This paper investigates consumer misperceptions of credit card debt interest costs through a combination of administrative data, surveys, and randomized controlled trials. Our findings indicate that consumers possess imperfect knowledge about the interest costs of unsecured debt, resulting in large debt accumulation. Rather than being driven by liquidity constraints, this over-borrowing appears to be a mistake mainly caused by spending on luxury goods. A simple text alert informing debt-takers of the true interest costs on their credit cards reduces credit card debt by over 10%.
