Impact of financial education and transparency on borrowing decisions. the case of consumer credit

Caratelli, Massimo and Ornella, Ricci (2011): Impact of financial education and transparency on borrowing decisions. the case of consumer credit.

Abstract

Existing studies are not conclusive in favor of a strong relationship between the financial literacy and the ability to take better borrowing decisions. Results are quite heterogeneous and often point out the relevance of other factors, such as socio-demographic features or practical experience gained with daily use of financial products. The impact of (the amount and quality of) information available at the time of consumer choice is still unexplored. The objective of this paper is to fill in this literature gap and explore a large set of possible drivers of borrowing decisions in the consumer finance framework, with a specific focus on the transparency of price conditions. We interviewed a sample of 299 consumers. They were asked to select the best option between five series of credit alternatives. In order to explore the role of transparency, each series of loans was presented with three different sets of information, with an increasing level of detail. The ability to select the best alternative was measured calculating a score based on the Net Present Value criterion, and analysed as the dependent variable of a regression model with demographic, socioeconomic and financial characteristics as predictors. Our findings show that the amount and quality of available information strongly influence the choice. At the same time, an high level of education do not seem to play a significant role. Financial maturity results to positive influence the ability to select the best alternative and employed people perform better than non-working respondents.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial education, Transparency, Borrowing, Consumer credit, Decision making
• Subjects: G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; I - Health, Education, and Welfare > I2 - Education and Research Institutions > I22 - Educational Finance ; Financial Aid

References

Caratelli, Massimo and Ornella Ricci (2011), "Impact of Financial Education and Transparency on Borrowing Decisions. The Case of Consumer Credit", working paper, January