Faculty Research: How Loan Applications Affect Consumer Borrowing

Personal loans serve a variety of important purposes for many people, allowing them to pay for large, unexpected purchases, consolidate debt, or pursue goals. But when someone asks to borrow from a lender, how does the loan application itself affect the amount they request?

Alicia M. Johnson, assistant professor of marketing at the Isenberg School of Management, set out to investigate this central question and found some intriguing impacts of personal loan applications on consumer borrowing. Her research, which she co-authored with Daniel Villanova and Ronn J. Smith from the University of Arkansas and the University of Wyoming, respectively, was recently accepted into the prestigious Journal of Consumer Research.

“Before academia, I worked as a loan officer in the personal finance industry, and I observed firsthand the various types of interactions consumers had with loan officers when applying for debt,” Johnson said. “Considering these observations, I wondered if asking consumers to indicate a desired monthly payment versus loan amount during the application process influenced the amount of debt consumers requested to borrow. It did—as these application formats scaled the loan amounts differently in consumers’ minds.”

Johnson and her co-authors found when an application asks for a desired loan amount, the borrower asks for the total amount they need. But when asked for their preferred monthly payment instead of the total amount, people think about their budget and request payments they see as affordable.

As a result, for lower cost expenditures, with a set term and interest rate, the researchers found that the monthly payment format results in consumers asking for a higher principal when compared to the loan amount format. For higher cost expenditures, consumers ask for a lower principal.

“In a time when many transactions, including loan applications, are becoming automated, the insights from this research—as well as other studies—reveal that consumers may benefit from interactions that help them connect all the moving pieces and see how their current personal financial situations are affecting future financial commitments,” Johnson said.

When asked where she wants to go next with her research, Johnson said she wants to study how everyday consumers choose between paying down their debt and putting money into their savings.

“I also want to better understand how consumers respond to personal finance marketing materials to develop interventions that can help consumers make better financial decisions, particularly if they lack the confidence to take advantage of existing products and services in the marketplace,” she said.