Minimum Payment Warnings and Information Disclosure Effects on Consumer Debt Repayment Decisions
Minimum Payment Warnings and Information Disclosure Effects on Consumer Debt Repayment Decisions
7 July, 2020 •Similar Articles
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Public policy makers encourage lenders to disclose loan cost information as a way of enabling borrowers to make more-informed debt repayment decisions. For example, current regulation requires credit card lenders to include a “minimum payment warning” on borrowers’ monthly statements, with the goal of encouraging borrowers to make larger monthly repayments each month and, consequently, decrease their debt levels. This research examines the effect of disclosing such information about future interest costs and time to pay off debt on consumers’ repayment decisions. The results indicate that disclosing information about the effects of repaying the minimum has little impact on repayment decisions. However, disclosing information about the effect of choosing an alternative course of action (i.e., a larger repayment amount) yielded a robust effect on repayment decisions. The findings suggest that cost information increases repayment amount for some borrowers, whereas time information may decrease repayment for others, especially those with little knowledge of interest compounding. This research provides some initial evidence of the impact of the CARD Act as well as that of similar regulations in Australia and Canada.