ESRI warns default options not always cheapest when buying financial products online

ESRI warns default options not always cheapest when buying financial products online

People could be paying thousands of euros over the odds when buying financial products online by falling foul of "subtle features" when they sign up, according to new research.

A new study by the Economic and Social Research Institute (ESRI) shows that people choosing loans via online calculators and portals are drawn towards the default options presented to them.

However, those options are not always the most economical in terms of repayments.

The research cites the example of a €10,000 loan secured online - for such a deal a one-year term might incur €500 in interest payments, versus €2,500 for a five-year term.

Dr Shane Timmons, a postdoctoral researcher with the ESRI and the study’s lead said that it is “difficult to know” whether or not Irish financial institutions were implementing online options in a certain manner in order to maximise their return.

“Longer terms mean more profits, so it’s in their interests to do so,” he said.

However he added that, in the course of their project, the researchers had reached out to banks both at home and abroad “but received no engagement”.

The study, published in the Journal of Behavioural and Experimental Finance and part-funded by the Competition and Consumer Protection Commission (CCPC), saw half of its test subjects choose a personal loan using an online calculator and search tool - features which are now commonplace in online banking.

Half of the sample had their default set to one year, with the remainder set to five years.

On average, the decisions recorded saw the subjects with the longer default opt for lengthier loan terms. This applied even to consumers who went out of their way to select and explore different options.

Loans costing 'at least €500 more'

“In our experiment, some consumers selected loans that would ultimately cost them at least €500 more, simply because the calculator first showed them a five-year repayment term,” Dr Timmons said.

As to why people are minded to select default options, he said that different theories have been proposed by behavioural economists.

“It’s the easiest course of action, and people may opt to stick to the route laid out for them.

“But also, some people might feel they are following best advice, that the bank is advising them with the default option, or that they are being pointed towards the social norm,” he added.

While the study was conducted with regard to online loans only, Dr Timmons said there is “definite scope” for the findings to apply to more onerous financial decisions, such as house mortgages or health insurance.

He added that the banks which the researchers considered tend to have longer repayment terms set as default, while price comparison sites will veer towards shorter timescales.

“For some consumers, a longer-term loan means lower repayments, so it’s more affordable,” Dr Timmons said.

“But for those who can afford to pay more per month, it’s going to cost them more.”

Áine Carroll, director of policy with the CCPC, meanwhile said that the consumer watchdog’s most visited pages online are its financial product comparison tools.

“As demonstrated by this research, consumers may unknowingly make decisions which could cost them more in the long run based on how information is presented,” Ms Carroll said.

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