The role of mental accounting in consumer credit decision processes

The role of mental accounts in consumer credit decision making was investigated. First, in a conversation-based process-tracing study, 96 adults with experience of credit were presented with minimal descriptions of three instalment credit options in realistic consumer scenarios. They chose a credit option and a repayment plan, but before doing so could request further information. When choosing the source of credit, participants usually sought and compared information on Annual Percentage Rate (APR) or total cost (TC), often using simple decision heuristics. When choosing repayment plans, they frequently asked about, and made trade-offs between, monthly repayment amounts, TC, and loan duration. Second, in an independent groups experiment, TC and APR information were systematically varied. Participants chose from pairs of repayment plans conflicting in loan duration and monthly repayment amount (N = 28). Although APR significantly influenced choice, its effect was substantially moderated by TC information. It was concluded that (i) although APR is an important attribute for source of credit decisions, TC is more important for repayment plan decisions, since consumers often represent specific credit plans in terms of total mental accounts; and (ii) recurrent budget period accounts are used to evaluate monthly repayments and anticipate future goals and hazards.