An Analysis of Loan Repayment Plans According to the Bank Customer Profile

Salvador Cruz Rambaud, María de los Ángeles Del Pino Álvarez

Abstract


It has been demonstrated that there exists a general preference for improvement in loan repayment plans in the way that people prefer decreasing sequences of installments as tested by Hoelzl et al. (2011). Moreover, they also demonstrated that there exists a positive correlation between financial capability and financial literacy when it is given the possibility of having a gain by investing a part of the available money. In these cases, the most financial literate consumers showed a preference for increasing loan plans instead of decreasing ones. In this vein, independently of the level of the borrowers’ risk profile, we suggest that an ad hoc offer should be made to the customers taking into account these two characteristics by distinguishing three different levels for both personal traits: low, medium and high. Thus, we have analyzed the interest rate which makes both the decreasing and the increasing loan plans indifferent when considering that the option to invest part of the money in savings products is given. Moreover, the analysis has been carried out by considering that the loan repaid principal is variable either in arithmetic progression or in geometric progression. Thus, regarding the main repayment plans offered by banks we have analyzed which one fits better to the defined customer’s profile.

 


Keywords


loan plan; sequence of payments; financial literacy; financial capability; customer’s profile

Full Text:

PDF

References


Atkinson, A., McKay, S., Kempson, E. and Collard, S. (2006). “Levels of financial capability in the UK: Results of a baseline survey”. FSA Consumer Research Paper 47. FSA: London.

Disney, R. and Gathergood, J. (2013). “Financial literacy and consumer portfolios”. Journal of Banking and Finance, Vol. 37, No. 7, pp. 2246-2254.

Gathergood, J. (2012). “Self-control, financial literacy and over-indebtedness”. Journal of Economic Psychology, Vol. 33, No. 3, pp. 590-602.

Hoelzl, E.; Kamleitner, B. and Kirchler, E. (2011). “Loan repayment plans as sequences of instalments”. Journal of Economic Psychology, 32, pp. 621-631.

Huston, S.J. (2010). “Measuring financial literacy”. The Journal of Consumer Affairs, Vol. 34, No. 2, pp. 296-316.

Kahneman, D.; Fredrickson, B.; Schreiber, C. and Redelmeier, D.A. (1993). “When more pain is preferred to less: adding a better ending”. Psychological Science, Vol. 4, No. 6, pp. 401-405.

Kempson, E., McKay, S. and Willitts, M. (2004). “Characteristics of families in debt and the nature of indebtedness”. Department for Work and Pensions Research Report No. 211.

Kozup, J. and Hogarth, J.M. (2008). “Financial literacy, public policy, and consumers’ self-protection - more questions, fewer answers”. The Journal of Consumer Affairs, Vol. 42, No. 2, pp. 127-136.

Loewenstein, G. and Prelec, D. (1993). “Preferences for sequences of outcomes”. Psychological Review, Vol. 100, No. 1, pp. 91-108.

Loewenstein, G. and Sicherman, N. (1991). “Do workers prefer increasing wage profiles”. Journal of Labor Economics, Vol. 9, No. 1, pp. 67–84.

Overton, A.A. and MacFadyen, A.J. (1998). “Time discounting and the estimation of loan duration”. Journal of Economic Psychology, 19, pp. 607-618.

Remund, D.L. (2010). “Financial literacy explicated: The case for a clearer definition in an increasingly complex economy”. The Journal of Consumers Affairs, Vol. 44, No. 2, pp. 276-295.

Taylor, M. (2011). “Measuring financial capability and its determinants using survey data”. Social Indicators Research, Vol. 102, No. 2, pp. 297-314.

Xiao, J.J. and O’Neill, B. (2016). “Consumer financial education and financial capability”. International Journal of Consumer Studies, Vol. 40, No. 6, pp. 712-721.

Xiao, J.J.; Chen, C. and Chen, F. (2014) “Consumer financial capability and financial satisfaction”. Social Indicators Research, Vol. 118, No. 1, pp. 415-432.




DOI: http://dx.doi.org/10.23755/rm.v35i0.430

Refbacks

  • There are currently no refbacks.


Copyright (c) 2018 Salvador Cruz Rambaud, Álvarez María de los Ángeles del Pino

Creative Commons License
This work is licensed under a Creative Commons Attribution 4.0 International License.

Ratio Mathematica - Journal of Mathematics, Statistics, and Applications. ISSN 1592-7415; e-ISSN 2282-8214.