Online tools can encourage consumers to pay more for loans, study finds

ESRI warns consumers of how information is presented by online loan calculators

Consumers have been warned about not getting swayed by online tools such as loan calculators when looking to buy financial products from websites as it could cost them dearly.

New research undertaken by the Economic and Social Research Institute (ESRI) in collaboration with the Competition and Consumer Protection Commission (CCPC), reveals that online banking tools can encourage consumers to unknowingly make costly decisions simply due to how information is presented.

The ESRI’s Behavioural Research Unit recently designed a controlled behavioural experiment which confirmed that consumers can be encouraged to select longer repayment terms on loans which can cost them significantly more due to additional interest costs.

As part of its test, the default repayment term of a €10,000 loan presented on a website was set at five years for some participants and at one year for others. The experiment found that consumers who saw the default term set at five years subsequently chose loans with longer repayment terms than those who saw the initial term set at one year.


The experiment revealed that approximately 15 per cent more consumers chose a loan of four years or longer when the default term was five years compared to when it was one year. Choosing a longer loan would have cost the average consumer a minimum of €470 in additional interest costs on a €10,000 loan.

"As online banking becomes more popular, our findings suggest that consumers should be wary of how their choices can be influenced," said Dr Shane Timmons, member of the ESRI's research unit and lead researcher on the study.

“In our experiment some consumers selected loans that would ultimately cost them at least €500 more, simply because the calculator first showed them a five-year repayment term.”

ESRI said behavioural economists believe these kinds of effects occur because default settings are treated like advice, or as signals of what other people would choose. When people are unsure, they can unwittingly be influenced by such signals.