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

The research found that consumers think interest rates are lower than they actually are, but loan seekers expect the interest rate they’ll receive to be 67% higher after seeing information from the price comparison tool. Similarly, consumers underestimate the dispersion of interest rates offered by various lenders, but the price comparison tool causes them to double their estimate of dispersion. The price comparison tool did not affect the number of institutions at which consumers searched or the interest rates they obtained, but did increase their probability of taking out a loan by 7%. In contrast, asking participants their expectations about interest rates and search caused them to obtain 1% lower interest rates on consumer loans without affecting their probability of taking out a loan.

Follow up surveys to better understand the mechanisms behind these outcomes are still outgoing. More results from this project are forthcoming.