Chapter 14: the psychology of borrowing and over-indebtedness Flashcards
What is the definition of over-indebtedness?
The sum total of payment demands are causing unsustainable financial stress
Why do people borrow?
(1) For maintenance –> just to make ends meet associated with low-income earners
(2) For improvement e.g. consumerist life-style, highly motivation by social comparison and associated with high-income earners
What are financial excluded people?
People who cannot access mainstream financial services
Financial exclusion is associated with (5)?
(1) Race
(2) Gender
(3) Income
(4) education
(5) Where do people live
What do you know about information search in the credit choice process? (4)
(1) Only 20% tries to get any info about multiple lenders or terms
(2) Those that do-so are younger and higher educated
(3) People either make a spontaneous choice or stick with a known option
4) People will seek more if information costs are low
what are the 2 different types of mental account used for credit evaluation?
(1) Total account = all future repayment are treated as equivalent to a total cost. Sum of total costs, which is cheaper?
(2) Recurrent budget period = weekly or monthly payment is important decision factor and duration + number of budget periods
What are the 4 different decision strategies for choosing credit
(1) Home-economicus = take lowest interest rate (APR)
(2) Total account = take option with lowest total costs
(3) Recurrent budget period = take the most favorable option in combination of length and amount of weekly installments
(4) Alternative mental account = take all variables into the comparison
What can you tell about found behavior in repayment (3)?
(1) Choose the highest repayment level affordable within a crecurrent budget period
(2) However, debtors tend to payoff smaller debts, rather than the debt with the highest interest rate
(3) The presence of minimum repayment information has been found to influence repayment decisions
One of the psychological consequences of debt is depression. What can you tell about this relation (4)?
(1) People with financial strain report higher levels of depressive symptoms
(2) 17% of people with issues now are depressed and 6% if you’ve ever had it in the past
(3) Mainly counted for by subjective factors instead of objective ones
(4) Feelings of hopelessness, worthlessness and demoralization mediate the link between debt and depression
One of the psychological consequences of debt is stress and anxiety. What can you say about this relationship? (5)
(1) Mortgage debt gives more stress to woman than man
(2) Men have stress but less after a year compared to woman
(3) Housing repayment difficulties leads to more stress than unemployment and divorce
(4) younger adults are more stressed by debt (logical life-cycle theory; they have more debt)
(5) Financial anxiety seems distinguishable from other forms of anxiety
What can you tell about policy implications: credit information disclosure (4)?
(1) Accurate value of APR should be disclosed clearly at an appropriate point in the sales process
(2) For all fixed repayments, a clear representation of monthly repayment, Lon duration and financial charge or total cost is required
(3) An alternative measure of relative costs could be routinely provided
(4) Total costs and loan duration info should be presented for a range of monthly repayment to alleviate minimum repayment anchoring effect
What can you tell about policy implication: financial education (5)
(1) Finaical education so far was limited effective, due to exclusion of psychological characteristics in financial behavior
(2) Help students to understand credit cost measures such as APR
(3) Teaching an approximate APR formule, drawing attention to APR/average relation
(4) Coaching on how to use financial price comparison websites
(5) Holisitc approach rather than calculative skills
What can you tell about policy implication: supporting those in financial distress (3)?
(1) Many over-indebted people either delay or do not seek financial help at all
(2) Probably caused by stress/anxiety that triggers avoidant behavior
(3) Contact between cities and major creditors such as utility companies and housing organizations for providing data so municipalities can contact people BEFORE they are over-indebt
