NEW YORK – As the COVID-19 pandemic drives U.S. unemployment to its highest levels since the Great Recession, many consumers have less spending money, are making more careful purchases, and are taking fewer vacations and buying fewer discretionary products and services. But while they may be spending more frugally, new research finds that when companies offer promotions for vacations and other experiential goods that include interest-free loans, consumers’ negative feelings toward debt lessen. Vicki Morwitz, Columbia Business School’s Bruce Greenwald Professor of Business, finds that even though consumers do not normally like to be in-debt or be in post pay for short-lived experiential goods like vacations, they are more likely to buy on credit when firms highlight that loans include a zero-percent interest rate. Morwitz cautions that interest-free deals raise serious concerns because they can induce consumers to spend beyond their means or sign up for terms they cannot afford.
Morwitz, and her co-authors at the University of Saint Gallen, Professors Johannes Christian Bauer and Liane Nagengast, build on past studies that find that consumers’ payment preferences differ based on the type of goods they are purchasing: consumers take an analytical approach when purchasing long-lasting material goods like a washing machine and therefore are willing to buy them on credit, but they feel more uncomfortable going into debt for short-lived experiential ones like vacations. The researchers conducted five experiments that asked participants to choose between material goods and experiential ones of a similar price. One of the studies involved 325 U.S. consumers recruited through the crowdsourcing panel Clickworker. Participants were divided into groups to assess two deals priced at $600 – a new stereo or a weekend city trip. Presented with the option of making three monthly installment payments or the option that highlighted that these payments were an interest free promotion, the researchers consistently found that when it was highlighted that payments were interest free, the majority of consumers were willing to look past their disdain for debt for the weekend trip, so long as the trip came with a post-payment zero-percent interest rate.
The study’s results have important implications for retail managers and marketers setting terms for promotions, as well as policymakers who regulate promotions that entice consumers to take on debt. The research also raises new questions about how consumer emotions can undermine financial literacy needed to properly evaluate interest-free promotions.
The study, Interest-Free Financing Promotions Increase Consumers’ Demand for Credit for Experiential Goods, is available online here.
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About the researcher
Vicki Morwitz is a Professor of Marketing at Columbia University's Graduate School of Business. Professor Morwitz earned a B.S in applied mathematics...Read more.