The Psychological Perspective on the Antecedents and Consequences of Consumer Borrowing

Abstract

Consumer credit is a major financial market worldwide. The market is a driver of economic growth that benefits consumers by allowing them to make purchases at times they otherwise could not afford. In this chapter we focus on consumers’ use of credit to fund purchases and how decisions to borrow are made. We also consider consequences of credit use, particularly negative ones such as over-indebtedness. Our conceptualization of the borrowing decision process taps into the perspective of dual process theories of judgement and decision making. Thus, decisions to borrow are partly effortless, fast, automatic, and emotionally charged, partly effortful, slow, deliberate, and cold-headed. Antecedents of credit use are needs aroused by old consumer products being worn out or desires evoked by the availability and marketing of new products. A major determinant of borrowing referred to as present-biased temporal discounting is that people judge the value of immediate consumption to exceed the value of deferred consumption. We review research on factors that limit borrowing by strengthening or weakening self-control. We also review research showing how borrowers evaluate credit options and decide which to accept. We further note that the pain of repaying loans may undermine satisfaction derived from consumption for borrowed money and that over-indebtedness has negative psychological consequences. Finally, we suggest issues for future research, including interventions to reduce overspending and overborrowing, the antecedent role of attitudes, the utility of qualitative versus quantitative information for informed credit choices, and the role of broader psychological support for those over-indebted.