An Analysis of Loan Repayment Plans According to the Bank Customer Profile

Authors

  • Salvador Cruz Rambaud Departamento de Economía y Empresa Universidad de Almería (Spain)
  • María de los Ángeles Del Pino Álvarez Departamento de Economía y Empresa Universidad de Almería (Spain)

DOI:

https://doi.org/10.23755/rm.v35i0.430

Keywords:

loan plan, sequence of payments, financial literacy, financial capability, customer’s profile

Abstract

It has been demonstrated that there exists a general preference for improvement in loan repayment plans in the way that people prefer decreasing sequences of installments as tested by Hoelzl et al. (2011). Moreover, they also demonstrated that there exists a positive correlation between financial capability and financial literacy when it is given the possibility of having a gain by investing a part of the available money. In these cases, the most financial literate consumers showed a preference for increasing loan plans instead of decreasing ones. In this vein, independently of the level of the borrowers’ risk profile, we suggest that an ad hoc offer should be made to the customers taking into account these two characteristics by distinguishing three different levels for both personal traits: low, medium and high. Thus, we have analyzed the interest rate which makes both the decreasing and the increasing loan plans indifferent when considering that the option to invest part of the money in savings products is given. Moreover, the analysis has been carried out by considering that the loan repaid principal is variable either in arithmetic progression or in geometric progression. Thus, regarding the main repayment plans offered by banks we have analyzed which one fits better to the defined customer’s profile.

 

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Published

2018-12-31

Issue

Vol. 35 (2018)

Section

Volume 35-2018

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