Wonder, N., Wilhelm, W., & Fewings, D. (2008). The financial rationality of consumer loan choices: revealed preferences concerning interest rates, down payments, contract length, and rebates. The Journal of Consumer Affairs, 42(2), 243-270.
Brief Description: This work studied consumer preferences for car loan features. The results revealed preferences that conflicted with traditional financial rationality. For example, participants avoided choosing long term (six- or seven-year) loans even when the interest rate was zero. In addition, the consumers, particularly those with less education, appeared to focus predominately on the first digit of monthly payments. A $395 car payment, for example, would be viewed as much better than a $400 payment, but a $390 payment would not be viewed as much better than a $395 payment.
Implications: Policies, programs and personal efforts to increase financial education are warranted, and consumers should be encouraged to compare interest rates on their sources and uses of funds. Some irrational preferences, however, may reflect psychological phenomena that are impervious to education. Availability of alternative means of self-control is important to the extent that aversion to long-term loans is a method of restraining personal spending.
