infonet-economy

Slogans such as "Buy Now, Pay Later" or "Same as Cash Financing" are found at many retailers and for a wide variety of products (cars, furniture, toys, jewelry, consumer electronics etc.). For example, Apple offers interest-free financing for 12 (6) months on purchases of US$999 and above (<US$999). Similarly, Europe's leading consumer electronics retailer Media Markt uses interest-free financing to boost sales. By advertising the aggregate selling price (e.g. "€1199.00") together with the monthly installment (e.g. "Only €49.99 per month"), Media Markt hopes to make their products appear more affordable and entice reluctant consumers to buy. Though interest-free deals can save money (cf. time-value-of-money-concept), they are often regarded as consumer traps because they encourage impulsive buying and because of their exorbitant penalty interest rates (up to nearly 30%) for defaults. This is dangerous for financially constrained households and may have contributed to the rise in personal bankruptcies. So far, however, there has been no academic research on consumers' reactions to interest-free deals. Therefore, this research investigates consumers' reactions to interest-free financing deals and shows in four laboratory experiments that evaluative judgments, emotions, behavioral intentions (purchase and financing intentions), and product choices depend on (1) consumers' personal financial situation, (2) how the interest-free deal is framed, and (3) consumers' impulsivity. Our findings are not only relevant for retailers but also for public policy because of the potential negative effects of interest-free deals on consumer welfare.