Reasons for loan repayment plan preferences.

Abstract

Recent research shows that the well-established preference for improvement can also be observed in a loan context. Consumers prefer loan repayment plans with falling or constant profiles over rising profiles. In this article, we replicated and extended Hoelzl, Kamleitner, and Kirchler’s (2011) study by altering the loan rate, loan amount, and loan combination. As expected, our results revealed a preference for falling over rising profiles regardless of loan rate, loan amount, and loan combination. We also found that undergraduate participants gave significantly lower scores to falling sequences but higher scores to constant sequences and rising sequences at a 10% loan rate, relative to the scores they gave at a 0% loan rate. They also gave significantly lower scores to falling sequences and constant sequences but higher scores to rising sequences when evaluating a phone loan, relative to the scores they gave when considering a car loan. We attempted to explore the reasons for the resulting preference pattern. Although optimization was identified as the most frequently chosen reason among the 4 explanatory options, about two-third respondents made decisions based on other reasons. An association between explanatory reasons and the preference for falling sequences was observed. Our findings suggest that future studies should focus on psychological reasons for the improving sequence effect rather than searching for discount functions to accommodate experimental results.