Do lower-income consumers prefer longer or shorter duration loans?
(A2024-119461)

AUTHORS

Farah Diba Abrantes-Braga, Insper; Diogo Hildebrand, Baruch College, CUNY; Manuela Dantas, California State University Northridge

ABSTRACT

Low-income consumers are said to make suboptimal financial decision making. We challenge this argument and show in this paper that when it comes to loan length, low-income prefer short (vs longer) terms avoiding to becoming indebt. A remarkable rise in Buy-Now-Pay Later popularity is noteworthy. But while BNPL products can enhance consumers’ access to affordable credit and smooth consumption shocks, they can also induce excessive borrowing. This research addresses the gap of how income and other substantively relevant factors may shape consumers' loan duration choices. We test our framework with two large-scale datasets encompassing more than 200.000 consumers —one from a financial institution in Italy and the other from Brazil. This paper makes a valuable substantive and theoretical contribution by documenting that low-income consumers counterintuitively acquire loans with shorter durations than high-income consumers. To the best of our knowledge, we are the first to propose and demonstrate the notion that such preferences are influenced by consumers’ income levels, are driven by the pain of paying installments, and are restricted to specific types of purchases.