The Impact of Price Comparison Tools in Consumer Credit Markets

Context

Consumer credit markets feature large amounts of within-borrower dispersion in interest rates, but if consumers are unaware of the extent of this price dispersion, they may shop at fewer lenders and take out loans at higher interest rates than they would otherwise.

Little is known about consumers’ prior beliefs about the distribution of interest rates nor how those beliefs affect their search in credit markets. If personalized information could influence their priors in a way that enables consumers to search for loans at more competitive rates, could that boost downstream financial health and well-being?

Study Design

To study these problems, researchers merged administrative data from the Chilean financial regulator on the universe of consumer loans with borrower characteristics to build a price comparison tool. The tool shows loan seekers a distribution of interest rates that similar borrowers obtained from their past loans.

The research team then conducted a randomized controlled trial with 117,045 prospective borrowers recruited through Google ads targeted to people searching for keywords related to consumer loans in Chile. These prospective borrowers were randomized into one of three groups:

1. Full price comparison tool: it shows potential borrowers the distribution of loans granted APRs, conditional on consumer and loan characteristics.
2. Simplified price comparison tool: it shows consumers how much they would save by searching at more banks, conditional on consumer and loan characteristics.
3. Control video: this video explains basic financial concepts about credits and does not provide information about the search and comparison of loans across banks.

The researchers will then measure how the price comparison tool affects borrowers’ beliefs about interest rate levels and dispersion, as well as how many loan offers they solicit and ultimately the number of loan offers they accept. Afterwards, researchers will conduct follow up surveys with participants that will help uncover the mechanisms affecting consumer behavior, such as the quality of searching that consumers conducted and the number of loan offers they received.

Results and Policy Lessons

This research found significant inaccuracies in consumers’ understanding of interest rates. About 73% of borrowers underestimated the interest rate they would receive on loans and 75% underestimated the variation in rates across lenders. These misconceptions stemmed from Google and third-party comparison websites, which advertised lower than realistic interest rates.
The price comparison tool displayed the distribution of interest rates for different borrower profiles, which led to substantial adjustments in expectations. Participants updated their expectations of interest rates and rate dispersion significantly higher. This tool did not affect the number of institutions at which consumers searched for the interest rates they obtained, but it did increase their probability of taking out a loan. In contrast, the simplified price comparison tool did not significantly affect participants’ expectations, search behavior, or loan terms.

A separate intervention that just asked participants about their prior expectations regarding interest rates also produced noticeable results. This treatment led participants to search at more institutions and obtain lower interest rates.

These findings highlight the value of providing accurate and personalized information to borrowers. While tools like the price comparison tool require substantial data resources, simpler interventions, like asking about priors, offer scalable, cost-effective methods to improve financial outcomes by encouraging consumers to search more effectively in credit markets.