Consumers find personal loans confusing and struggle to choose the right one, according to a new ESRI report, An Experimental Investigation of Personal Loan Choices.

The report describes experiments conducted in PRICE Lab – a research programme in behavioural economics jointly funded by the Central Bank of Ireland, the Commission for Communications Regulation, the Commission for Energy Regulation and the Competition and Consumer Protection Commission. The findings reveal that 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 experiments tested whether consumers’ decisions were affected by which information was made explicit in the offer. The results showed that 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.

PRICE Lab also tested two policy interventions, or “nudges”, designed to help consumers to make better decisions in the personal loans market. A “high cost loan” warning was found to reduce the chances that consumers opted 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. This is the first time that interventions have been experimentally pre-tested like this in Ireland.

Dr. Pete Lunn, Principal Investigator of PRICE Lab, said “Our experiments suggest consumers could be vulnerable to certain marketing techniques, which are 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. ”