Confused borrowers are making expensive mistakes costing them thousands of euro extra in some cases, a new report has found.
An ESRI investigation into customers’ personal loan choices revealed consumers find it hard to understand how the length of a loan affects both the size of monthly repayments and the overall amount it costs to borrow, leading to inconsistent choices.
The impact of marketing and whether information was explicitly presented was also investigated by the report with the results showing consumers to be “vulnerable” to certain marketing techniques, according to report author Dr Pete Lunn.
“Our experiments suggest consumers could be vulnerable to certain marketing techniques, likely to tempt them towards longer loans that ultimately cost more. Yet our results also point to ways we can help consumers to make better choices in this market,” Dr Lunn said.
The results showed consumers chose to pay the loan back over a longer period when the size of the monthly repayments was highlighted than when the overall financial cost was highlighted.
The inconsistency sometimes equated to thousands of euros over the course of a loan.
The report highlighted two policy interventions that are likely to help consumers, including introducing a “high cost loan” warning which was found to reduce the chance of borrowers opting for loans with above average interest rates.
Providing consumers with a specific table of example loans before they made their choices also helped them to make more consistent decisions.
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