Loan Amount versus Monthly Payments: The Effect of Loan Application Formats on Consumer Borrowing Decisions

Do different loan application formats affect consumer loan requests? Six studies show that when consumers are asked to provide a preferred monthly payment (vs. loan amount), they request different principal amounts. This is because these loan application formats differ in the scale-compatible information they bring to consumers’ mind. When loan amounts are elicited, consumers think of and request the cost of the expenditure they seek to finance. When monthly payments are elicited, however, consumers think of their monthly budget slack to construct and then request monthly payments they perceive to be affordable. For lower cost loans with a given term and interest rate, the monthly payment (vs. loan amount) format results in larger principal requests. This effect reverses for higher cost acquisitions because individuals’ budget slack caps out around $500 per month. These studies provide insight into how consumer loan application formats can affect consumer borrowing, as well as the psychological underpinnings responsible for the effect. Theoretical, managerial, and consumer welfare implications of the findings are discussed.