V A T T I T U D E S TOWARD SALES FINANCE COMPANIES AND INSTALLMENT C R E D I T Report Issued by the SURVEY RESEARCH CENTER I N S T I T U T E FOR SOCIAL RESEARCH T H E UNIVERSITY O F MICHIGAN Based on a Nationwide Sample Interview Survey 27 S5 ANN ARBOR, MICHIGAN JANUARY 1960 a — ) Introduction The Survey Research Center hereby p r e s e n t s i t s r e p o r t on a n a t i o n w i d e sample i n t e r v i e w survey, conducted 1959, toward the end o f the year i n which people's a t t i t u d e s toward d i f f e r e n t ways o f f i n a n c i n g the purchase o f a u t o m o b i l e s have been s t u d i e d . q u i r y can be s t a t e d as f o l l o w s : The starting point of this i n - D u r i n g t h e p a s t few years commercial banks have e n t e r e d t h e business o f consumer i n s t a l l m e n t c r e d i t and through vigorous merchandising succeeded campaigns t o seize a f a i r share o f t h a t b u s i - ness f r o m sales f i n a n c e companies. The l a t t e r d i d not attempt to contact the a u t o m o b i l e buyers d i r e c t l y and were s a t i s f i e d t o m a i n t a i n t h e i r tradi- t i o n a l connections w i t h automobile d e a l e r s . The survey shows t h a t banks a r e p o p u l a r and h i g h l y regarded, w h i l e s a l e s f i n a n c e companies are unknown t o broad groups o f people and are o f t e n confused w i t h l o a n companies, t h e p r i m a r y business o f which i s t o g r a n t s m a l l cash l o a n s . A l t h o u g h adverse o p i n i o n s about f i n a n c e com11 p a n i e s " are f r e q u e n t l y v o i c e d , i t does n o t seem t h a t many people have s t r o n g l y h e l d u n f a v o r a b l e c o n v i c t i o n s . Needless t o say, i t i s e a s i e r to f i g h t l a c k o f i n f o r m a t i o n than t o c o u n t e r a c t d e r o g a t o r y o p i n i o n s . The s t u d y was d i r e c t e d by George Ratona, w i t h t h e a s s i s t a n c e of Margaret Wood. i Table o f Contents Chapters Page 1. Finance Companies Versus Banks 2. B o r r o w i n g t h r o u g h t h e Car D e a l e r : 3. Car Insurance and I n s t a l l m e n t Buying 16 4. Differences Among Finance Companies 20 5. A t t i t u d e s Toward I n s t a l l m e n t C r e d i t 27 6. The Cost o f I n s t a l l m e n t C r e d i t 39 Appendix: v Methodology 1 Sources o f C r e d i t . . 12 43 Supplementary Tables 45 ii 1. Finance Companies Versus Banks What do people t h i n k a r e t h e b e s t ways t o f i n a n c e t h e i r o f automobiles? purchases Do people i n v a r i o u s groups p r e f e r t o o b t a i n c r e d i t from banks so as t o pay the d e a l e r c a s h , o r do they p r e f e r t o e n t r u s t the c a r d e a l e r w i t h t h e task o f a r r a n g i n g f o r time payments? B e f o r e these q u e s t i o n s can be r a i s e d , i t i s necessary t o f i n d o u t what people know about d i f f e r e n t potential lenders. Table 1 shows t h a t p u b l i c i n f o r m a t i o n about t h e sources o f i n s t a l l - ment c r e d i t i s widespread and s u b s t a n t i a l l y c o r r e c t . When asked, What p l a c e s ,f can one go t o arrange f o r f i n a n c i n g a c a r ? " 62 p e r c e n t o f a l l people and a 1 somewhat h i g h e r p r o p o r t i o n o f upper income people m e n t i o n banks as w e l l as f i n a n c e companies. The r e m a i n i n g people f a l l i n t o two groups. I \ One o f these groups, 14 p e r c e n t o f a l l , knows n e i t h e r o f banks o r f i n a n c e companies; t h i s group c o n s i s t s m o s t l y o f low-income fore o f l i t t l e i n t e r e s t . people o r o l d e r people and i s t h e r e - The o t h e r group, a l t o g e t h e r 24 p e r c e n t , mentions ft c e r t a i n sources o f c r e d i t o n l y and i s o f g r e a t e r i n t e r e s t even though abs t a i n i n g f r o m m e n t i o n i n g a source may be a v e r b a l l a p s e r a t h e r t h a n an i n d i c a t i o n o f lack o f f a m i l i a r i t y . I t appears t h a t 18 p e r c e n t o f a l l people (and 22 p e r c e n t o f people w i t h o v e r $10,000 income) mentioned banks b u t n o t f i n a n c e companies, w h i l e 6 p e r c e n t o f a l l •— • (and 3 p e r c e n t o f h i g h - -t income) people mentioned f i n a n c e companies .but n q t ^ b a n k s . Table IB shows t h a t t h e l e v e l o f i n f o r m a t i o n about sources o f c r e d i t i s g r e a t e r among people who do have i n s t a l l m e n t debt than among those who do n o t . Even t h e s i z e o f m o n t h l y payments makes a d i f f e r e n c e . When t h e m o n t h l y payments a r e l a r g e ( o v e r $100) t h e i n f o r m a t i o n i s more complete than when t h e y a r e s m a l l (under $50). 1- <tf fr-* ^ 1 -2A f t e r i t was found out how much o r how little survey respondents knew about the sources o f c r e d i t t h e y were t o l d : Mr. Smith and Mr. Jones b o t h needed $1500 t o pay f o r a new c a r . Mr. Smith went t o a bank b e f o r e he bought the c a r and borrowed the money; Mr. Jones arranged f o r the time payments w i t h t h e c a r dealer. F o l l o w i n g t h i s i n t r o d u c t i o n , respondents why Mr. were asked t o e x p l a i n Smith d i d go t o the bank, t o t e l l what k i n d o f person he i s , t o ex- press an o p i n i o n about how he was t r e a t e d by the bank and, f i n a l l y , t o say what would happen i f he f a i l e d t o make a payment when due. q u e s t i o n s were asked r e g a r d i n g Mr. Jones, who w i t h the car dealer. The same f o u r f o r the time payments two s e t s o f answers t o the f o u r p a r a l l e l are p r e s e n t e d i n Table 2. The arranged The questions I t appears t h a t banks are overwhelmingly i n t e r e s t they charge i s b e l i e v e d t o be l o w e r . People who are c a l l e d i n t e l l i g e n t , info-gmed-r-or-j&f h i g h s t a t u s . popular. f r e q u e n t them Banks are thought t o t r e a t t h e i r customers w e l l and t o g i v e them easy accommodation i n case o f need. On the o t h e r hand, people who arrange f o r time payments t h r o u g h t h e c a r d e a l e r are f r e q u e n t l y c h a r a c t e r i z e d i n l e s s complimentary ways. The d i f f e r e n c e s between the two s e t s o f answers are s m a l l e s t i n the t h i r d category (Table 2C): well. Car d e a l e r s are l i k e w i s e t h o u g h t t o t r e a t t h e i r customers But o n l y a few o f t h e customers o f c a r d e a l e r s a r e c a l l e d o r i n f o r m e d , and many more s t u p i d , p o o r l y I n f o r m e d , o r unwise. intelligent Mr. Jones, who went t o a c a r d e a l e r , i s f r e q u e n t l y c a l l e d a low s t a t u s o r low-income person and, f i r s t o f a l l , an i m p a t i e n t o r i m p u l s i v e person who does n o t p l a n ahead. I t should be s t r e s s e d t h a t these d e s c r i p t i o n s are spontaneous ones, g i v e n by t h e respondents t o l d was w i t h o u t any p r o m p t i n g . the simple q u e s t i o n : A l l t h e respondents What k i n d o f a person was Mr. Jones who made arrangements w i t h the c a r d e a l e r ? As t h e t a b l e shows, 27 per c e n t o f the sample d i d n o t f o l l o w t h e s p i r i t o f t h e q u e s t i o n i n g , shrugged t h e i r o r s a i d they d i d n ' t know. were shoulders, Whatever the o t h e r people s a i d , I n t e r v i e w e r s attempted t o w r i t e down as c l o s e l y v e r b a t i m as p o s s i b l e . then grouped i n t o c a t e g o r i e s i n the c e n t r a l o f f i c e . Table 2B, i t was The answers were As can be seen from p o s s i b l e t o group most answers i n a few c a t e g o r i e s . Most r e v e a l i n g a r e the reasons respondents a t t r i b u t e t o Mr. f o r h i s g o i n g t o the c a r d e a l e r r a t h e r t h a n t o a bank. reasons are connected w i t h i n a b i l i t y t o go t o a bank: Jones S e v e r a l o f these Some 10 per cent say so f l a t l y , w h i l e 17 per c e n t r e f e r t o l a c k o f c r e d i t o r l a c k o f s e c u r i t y on the p a r t o f the would-be b o r r o w e r . A f u r t h e r 10 per c e n t a t t r i b u t e t o Mr. Jones a l a c k o f knowledge about advantages o f f i n a n c i n g through a bank. There a r e , o f c o u r s e , respondents who m e n t i o n p o s i t i v e f a c t o r s w h i c h make borrowers go t o the car d e a l e r s . t h i s way, are q u i c k e r , are concluded pressed C r e d i t arrangements are more convenient w i t h l e s s r e d t a p e - - t h i s i s the ex- o p i n i o n of o n e - f i f t h o f people. That i t i s e a s i e r t o get a loan o r t h a t c r e d i t standards a r e lower a t car d e a l e r s I s the spontaneous e x p l a n a t i o n o f 6 per c e n t . An a d d i t i o n a l 5 per c e n t say t h a t one makes s m a l l e r payments o r has more time t o repay the c r e d i t i f one arranges f o r c r e d i t w i t h the c a r dealers. Somewhat s u r p r i s i n g l y , the o v e r w h e l m i n g l y f a v o r a b l e o p i n i o n about j banks extends even t o the a c t i o n taken by the c r e d i t o r i f a borrower make a payment. I t i s the o p i n i o n o f 15 per c e n t o f people t h a t i n such a case banks take s p e c i f i c d r a s t i c a c t i o n ( r e p o s s e s s i o n o f the c a r , law and the l i k e ) . cannot suit, But 43 per c e n t t h i n k t h a t the l e n d e r w i t h whom the car d e a l e r makes the arrangements would take d r a s t i c a c t i o n . S i m i l a r l y , the o p i n i o n t h a t the l e n d e r would make an easy accommodation i s much more f r e q u e n t l y a t t r i b u t e d t o banks than t o o t h e r c r e d i t o r s . When the v a r i o u s o p i n i o n s about banks and o t h e r sources o f autom o b i l e c r e d i t are s t u d i e d i n d i f f e r e n t p o p u l a t i o n groups the b a s i c p i c t u r e as presented above does n o t change. For i n s t a n c e , r e g a r d i n g the a c t i o n i n -4case o f d e f a u l t , i t i s t r u e t h a t fewer Negro than w h i t e respondents b e l i e v e l n easy accommodation, b u t the d i f f e r e n c e between banks and o t h e r sources o f c r e d i t remain p r a c t i c a l l y unchanged. When the sample i s broken by urban and r u r a l r e s i d e n c e , no d i f f e r e n c e s appear. E x t e n t o f e d u c a t i o n , on the o t h e r hand, makes f o r some d i f f e r e n c e s , m a i n l y l n the o p i n i o n about banks. h i g h e r the e d u c a t i o n , the more f a v o r a b l y are banks Judged. The The same i s t r u e o f upper income f a m i l i e s as shown i n two supplementary t a b l e s . Comparison between banks and o t h e r l e n d e r s has been c a r r i e d out by the Survey Research Center i n a r e l a t e d area some time ago. Small p e r s o n a l loans r a t h e r than f i n a n c i n g a u t o m o b i l e purchases were s t u d i e d a t t h a t t i m e , and t h e q u e s t i o n was asked from a s m a l l sample o f respondents why Mr. Smith went t o a bank and why Mr. Jones went t o a l o a n company i n o r d e r t o borrow a few hundred d o l l a r s . The answers r e c e i v e d t o t h a t p r e v i o u s i n q u i r y were q u i t e s i m i l a r t o the more r e c e n t one. I t t h e r e f o r e appears d o u b t f u l t h a t we are c o n f r o n t e d here w i t h adverse o p i n i o n s toward p e r s o n a l l o a n companies, s a l e s f i n a n c e companies, o r c a r d e a l e r s . are i n s t i t u t i o n s h e l d i n h i g h esteem. I t i s much more probable t h a t banks E a r l i e r s t u d i e s r e v e a l e d t h a t the s t e r e o t y p e , a l l e g e d l y w i d e l y p r e v a l e n t i n the p a s t , t h a t banks are i n s t i t u t i o n s w h i c h may stuffy be e n t e r e d o n l y w i t h h a t i n hand, has l o s t credence. What remained from t h a t n o t i o n i s t h a t banks are h i g h - c l a s s p a t r o n i z e d by upper c l a s s people o r i n f o r m e d people. institutions T h e r e f o r e , the behavior o f banks toward customers i s thought t o be most accommodating and those are i n f o r m e d o r those who can a f f o r d i t should go t o banks. T h i s i s , however, n o t the whole s t o r y . i n Table 2A w h i c h we have n o t y e t d i s c u s s e d d i d Mr. who There i s another in detail. To the q u e s t i o n , Smith go t o a bank, 52 per c e n t o f a l l people s a i d t h a t t h e i n t e r e s t r a t e charged by banks i s lower. finding spontaneously Because o f the o f o p i n i o n s about l e v e l o f i n t e r e s t r a t e s , t h i s problem was why importance raised i n a -5s p e c i f i c q u e s t i o n addressed t o r e s p o n d e n t s , on w h i c h we r e p o r t i n Table 3. I t appears t h a t 56 per c e n t o f a l l people say when q u e s t i o n e d d i r e c t l y the that c o s t o f f i n a n c i n g i s h i g h e r i f one a r r a n g e s f o r c r e d i t w i t h a c a r d e a l e r r a t h e r t h a n w i t h a bank. much h i g h e r . Most o f these people say even t h a t the c o s t i s There a r e o n l y a few p e o p l e who b e l i e v e t h a t banks charge more, somewhat more who say t h a t t h e r e i s no d i f f e r e n c e and, f i n a l l y , t h e r e are many p e o p l e e s p e c i a l l y among lower income groups who do n o t know whether there i s a d i f f e r e n c e . I t may be t h o u g h t t h a t a r r a n g i n g f o r i n s t a l l m e n t c r e d i t through a car d e a l e r has c l e a r - c u t advantages i n terms o f convenience (one arranges f o r e v e r y t h i n g a t the one p l a c e where one goes anyhow t o purchase a c a r ) and from t h e p o i n t o f v i e w o f e s t a b l i s h i n g c l o s e r e l a t i o n s w i t h t h e agency w i t h w h i c h most buyers remain i n c l o s e touch f o r s e r v i c i n g t h e i r new c a r . As i s shown i n Table 2A, o n l y a m i n o r i t y (20 p e r c e n t ) o f people r e c o g n i z e the f i r s t advantage. I t appears f r o m Table 4 t h a t o n l y a s m a l l m i n o r i t y (10 per c e n t ) agree t h a t t h e r e i s an advantage i n the second r e s p e c t . When s e r v i c i n g o f the c a r i s d i s c u s s e d , o n e - f o u r t h o f the people have no o p i n i o n and over 60 per c e n t say f l a t l y t h a t arrangements f o r i n s t a l l m e n t c r e d i t make no d i f f e r e n c e i n s e r v i c i n g . As a f i n a l q u e s t i o n i n s t u d y i n g the d i f f e r e n c e s between arrangements t h r o u g h banks v e r s u s d e a l e r s , respondents were asked whether t h e y thought i t makes a d i f f e r e n c e t o t h e d e a l e r whether a c a r buyer arranges f o r t h e c r e d i t w i t h him o r w i t h a bank. people t h i n k so. I t i s shown i n Table 5 t h a t about o n e - t h i r d o f a l l I n e x p l a i n i n g t h e i r o p i n i o n , many^respondents say t h a t the d e a l e r makes money ( o r r e c e i v e s a k i c k b a c k ) i f he concludes the c r e d i t a r rangements. But even respondents who express t h i s o p i n i o n a r e found t o p r e f e r b o r r o w i n g f r o m banks. I t appears then t h a t few a u t o m o b i l e buyers b e l i e v e i n d o i n g the car dealer a favor. Economic Behavior Program -6- .Survey Research Center Table 1 I n f o r m a t i o n about Where One Can Arrange F i n a n c i n g o f Car A. By Income Income $5000 -7499 All Under $3000 $3000 -4999 15% 16% 15% 13% 14% 14% F i n a n c e company alone 6 8 6 6 3 3 Bank and c r e d i t u n i o n 3 * 3 3 2 8 57 41 61 66 67 64 Bank, c r e d i t u n i o n , and f i n a n c e company 5 1 5 8 10 5 Other 3 6 3 2 1 1 Don't know; n o t ascertained 11 28 7 2 3 5_ Total 100% 100% Type o f Lender, Spontaneously Mentioned Bank alone Bank and f i n a n c e company B. 100% 100% $7500 -9999 $10,000 and o v e r 100% 100% By Debt Size o f M o n t h l y Payments None Under $50 $50 - 99 $100 or o v e r 17% 16% 8% 9% F i n a n c e company alone 6 6 5 7 Bank and c r e d i t u n i o n 3 2 4 1 52 59 70 72 Bank, c r e d i t u n i o n , and f i n a n c e company 4 3 9 7 Other 4 3 2 3 14 11 2 1_ 100% 100% Bank alone Bank and f i n a n c e company Don't know; n o t a s c e r t a i n e d Total 100% * Less t h a n o n e - h a l f o f one per c e n t . The q u e s t i o n was: "About t h e f i n a n c i n g o f t h e purchase o f a c a r can one go t o a r r a n g e f o r f i n a n c i n g a c a r ? " 100% what p l a c e s Survey Research Center -7- Economic Behavior Program Table 2 C r e d i t Arrangements A. t h r o u g h Car Dealer o r Bank Why One o r t h e Other Why Mr. Jones made arrangements w i t h t h e c a rd e a l e r Why Mr. Smith went t o a bank More c o n v e n i e n t ; q u i c k e r ; l e s s r e d tape C r e d i t i s n ' t good; no s e c u r i t y Ignorance o f disadvantages Can't go t o a bank C r e d i t standards a r e l o w e r ; e a s i e r t o g e t a loan S m a l l e r payments; more t i m e t o payback Advertising, publicity Other Don't know; n o t a s c e r t a i n e d I n t e r e s t i s lower Had t i e s t o banks Banks a r e sounder, more r e s p e c t a b l e , more r e l i a b l e C o l l a t e r a l a v a i l a b l e , good c r e d i t standing 52% 10 Other Don't know; n o t a s c e r t a i n e d 10 16 Total 20% 17 10 10 6 5 1 12 19 100% B. Total 7 5 100% C h a r a c t e r i z a t i o n o f Borrower What k i n d o f a person i s Mr. Jones who made arrangements w i t h t h e c a r d e a l e r ? What k i n d o f a person i s Mr. Smith who went t o a bank? I n t e l l i g e n t , informed 5% H i g h s t a t u s , r i c h , w e l l educated, i m p o r t a n t * Respectable; honest, r e l i a b l e man w i t h steady j o b 10 An average guy 10 I m p a t i e n t , i m p u l s i v e , e x t r a v a g a n t , does n o t p l a n 17 S t u p i d , p o o r l y i n f o r m e d , unwise 11 Low s t a t u s ; l o w income, b a d l y educated w o r k i n g man 11 Other, somebody l i k e me 9 Don't know; n o t a s c e r t a i n e d 27 I n t e l l i g e n t , informed 47% H i g h s t a t u s , r i c h , w e l l educated, i m p o r t a n t 5 Respectable; honest, r e l i a b l e man w i t h steady j o b 8 An average guy 3 R e s t r a i n e d , plans ahead, does n o t s p l u r g e 13 S t u p i d , p o o r l y i n f o r m e d , unwise 1 Low s t a t u s ; low income, b a d l y educated w o r k i n g man 1 Other, somebody l i k e me 3 Don't know; n o t a s c e r t a i n e d 19 Total 100% Total 100% Survey Research Center C. How was Mr. Jones t r e a t e d TABLE 2 CONTINUED -8How Borrower Was T r e a t e d How was Mr. Smith t r e a t e d by t h e c a r d e a l e r ? Treated w e l l , courteously T r e a t e d w e l l , i f h i s c r e d i t was good Treated w e l l , w i t h other q u a l i f i c a t i o n s I n a b u s i n e s s l i k e manner Delay, checked over Fairly; just a l l right Badly, n o t w e l l Depends on t h e d e a l e r No comment 49% 5 8 1 * 18 3 1 1 14 Don't know; n o t a s c e r t a i n e d Treated w e l l , courteously T r e a t e d w e l l , i f h i s c r e d i t was good Treated w e l l , w i t h other q u a l i f i c a t i o n s I n a b u s i n e s s l i k e manner Delay, checked over Fairly, just a l l right Not t o o w e l l , banks a r e c o l d , unpleasant Depends on t h e bank No comment D. 100% I n Case o f D e f a u l t I f Mr. Smith who went t o a bank cannot make a payment, what w i l l happen? S p e c i f i c d r a s t i c a c t i o n ; r e p o s s e s s i o n , law s u i t They would t a k e steps t o be sure t h e y c o l l e c t e d A c t i o n only a f t e r delay They would be tougher t h a n t h e bank An easy accommodation N o t h i n g w i l l happen Depends on t h e c a r d e a l e r Don't know; n o t a s c e r t a i n e d S p e c i f i c d r a s t i c a c t i o n ; r e p o s s e s s i o n , law s u i t They would t a k e steps t o be sure they c o l l e c t e d A c t i o n o n l y a f t e r delay They would be tougher t h a n t h e f i n a n c e company An easy accommodation N o t h i n g w i l l happen Depends on t h e bank Don't know; n o t a s c e r t a i n e d Less t h a n o n e - h a l f o f one p e r c e n t . 12 Total I f Mr. Jones who made arrangements w i t h t h e c a r d e a l e r cannot make a payment, what w i l l happen? Total 58% 9 5 Don't know; n o t a s c e r t a i n e d 100% Total by t h e bank? 100% Total 100% Survey Research Center Economic Behavior Program -9- Table 3 D i f f e r e n c e i n Cost o f F i n a n c i n g t h r o u g h Car Dealer o r Bank A. By Income D i f f e r e n c e i n Cost All Under $3000 $3000 -4999 Car d e a l e r i s h i g h e r 56% 37% 63% 63% 72% 65% (33) (19) (37) (38) (51) (36) (17) (6) (13) (5) (18) (8) (20) (5) (16) (5) (22) (7) Much h i g h e r D i f f e r e n c e does n o t amount t o much Don' t know by how much Income $7500 $5000 -9999 -7499 $10,000 and over Bank i s h i g h e r 3 4 4 2 3 3 There i s a d i f f e r e n c e , d o n ' t know w h i c h i s h i g h e r 2 1 2 2 * 2 No d i f f e r e n c e 11 12 10 12 10 12 D o n 1 know 25 40 20 19 14 17 3 6 1 2 1_ 100% 100% 100% 100% 1 Not a s c e r t a i n e d Total 100% 1 100% B. _By E d u c a t i o n Grade s c h o o l ; none Some h i g h school Completed h i g h school Some college College degree 44% 61% 69% 68% 66% Bank i s h i g h e r 3 2 2 3 4 There i s a d i f f e r e n c e d o n ' t know w h i c h i s h i g h e r 2 1 1 2 No d i f f e r e n c e 13 8 13 10 12 Don't know 34 26 15 17 16 Not a s c e r t a i n e d 4 2 1_ 1 * Total 100% q 100% 100% Car d e a l e r i s h i g h e r 100% 100% * Less than o n e - h a l f o f one per c e n t . The q u e s t i o n s were: " I s t h e r e a d i f f e r e n c e i n c o s t i f one makes arrangements f o r f i n a n c i n g w i t h a c a r d e a l e r o r w i t h a bank? Which one i s h i g h e r ? Would you say t h a t i t i s a l a r g e d i f f e r e n c e or t h a t i t does n o t amount t o much?" Survey Researeh Center Economlc Behavior Program -10- Table 4 D i f f e r e n c e i n S e r v i c e Depending on Arrangements f o r F i n a n c i n g D i f f e r e n c e i n How t h e Car I s S e r v i c e d All B e t t e r s e r v i c e d i f bought on t i m e from t h e d e a l e r 11% 10% 10% 14% 13% 12% (4) (3) (5) (3) (4) Much b e t t e r $3000 -4999 Income $5000 $7500 -7499 -9999 Under $3000 $10,000 and o v e r D i f f e r e n c e does n o t amount t o much (6) (4) (6) (7) (8) (8) Don't know by how much (1) (2) (1) (2) (2) (*) 2 2 1 2 1 2 61 41 66 69 71 76 21 41 18 11 10 9 2 1 1 B e t t e r s e r v i c e d by t h e d e a l e r i f f i n a n c e d t h r o u g h a bank There i s a d i f f e r e n c e , don't know w h i c h i s b e t t e r No difference Don't know Not ascertained Total 3_ 100% 5 100% 2_ 100% 100% 100% 100% * Less than o n e - h a l f o f one p e r c e n t The q u e s t i o n s were " I f one makes arrangements f o r f i n a n c i n g w i t h a c a r d e a l e r o r w i t h a bank, i s t h e r e any d i f f e r e n c e I n how t h e c a r i s serv i c e d by t h e d e a l e r ? Would you say t h a t i t i s a l a r g e d i f f e r e n c e o r t h a t i t does n o t amount t o much?" Survey Research Center Economic Behavior Program -11- Table 5 O p i n i o n s about Whether I t Makes a D i f f e r e n c e t o t h e D e a l e r How F i n a n c i n g I s Arranged Opinion All There i s a d i f f e r e n c e 34% 28% 31% 40% 46% 35% There i s no d i f f e r e n c e 47 36 54 51 46 54. Don't know 15 29 12 8 6 8 Not a s c e r t a i n e d 4 7 3 2 3 Total 100% The q u e s t i o n was: 100% $3000 -4999 Income $5000 -7499 Under $3000 100% 100% $7500 -9999 100% $10,000 and over 100% "Do you t h i n k i t makes a d i f f e r e n c e t o t h e d e a l e r whether a car buyer arranges f o r t h e c r e d i t w i t h him o r w i t h a bank? 2. B o r r o w i n g t h r o u g h t h e Car D e a l e r : Sources o f C r e d i t A second s e c t i o n i n t h e q u e s t i o n n a i r e d e a l t w i t h arrangements made w i t h d e a l e r s f o r t h e f i n a n c i n g o f t h e purchase o f a c a r . I n t h i s respect, a g a i n , f i r s t people's l e v e l o f i n f o r m a t i o n had t o be d e t e r m i n e d . know who a c t u a l l y lends t h e money when a c a r buyer makes c r e d i t through a d e a l e r ? Do people arrangements As shown i n Table 6 i n f o r m a t i o n i s widespread and sub- stantially correct. To be s u r e , even among high-income people some do n o t know t h e answer t o o u r q u e s t i o n and some more b e l i e v e t h a t c a r d e a l e r s o r c a r m a n u f a c t u r e r s a r e t h e sources o f c r e d i t . The p r o p o r t i o n o f people who mention b o t h banks and f i n a n c e companies i s f a i r l y s m a l l ; t h e m a j o r i t y r e f e r s t o one or the o t h e r . Finance companies as t h e o n l y source o f c r e d i t a v a i l a b l e t o c a r d e a l e r s a r e mentioned much more f r e q u e n t l y t h a n banks are mentioned as the o n l y source. T h i s i s t r u e n o t o n l y o f a l l income groups b u t a l s o i f people are d i v i d e d a c c o r d i n g t o t h e s i z e o f t h e i r monthly i n s t a l l m e n t payments (Table 6 B ) . One m i g h t imagine t h a t t h e c a r buyer d e a l s w i t h t h e d e a l e r alone and need n o t be concerned w i t h w h i c h k i n d o f i n s t i t u t i o n t h e d e a l e r makes t h e c r e d i t arrangements f o r h i m . I t was f o u n d , however, t h a t i n t h e o p i n i o n o f the m a j o r i t y o f people t h e c a r buyer should be concerned (59 p e r c e n t s a i d s o ) . Those who s a i d t h a t people should be concerned were asked whether t h e y had a preference. The answers shown i n Table 7 i n d i c a t e c l e a r l y t h a t most people express a d e f i n i t e p r e f e r e n c e f o r t h e d e a l e r s making c r e d i t arrangements w i t h banks. Why do people have these p r e f e r e n c e s ? The g r e a t m a j o r i t y o f those who s a i d t h a t t h e y would p r e f e r t o have t h e i r d e a l e r a r r a n g e t h e l o a n w i t h banks s a i d t h a t t h i s i s t h e cheapest way ( l o w e r charges o r lower i n t e r e s t -12- -13- r a t e s were mentioned by 28 per c e n t o f a l l p e o p l e ) . have a b e t t e r r e p u t a t i o n (13 per c e n t ) . A still Others s a i d t h a t banks s m a l l e r group s a i d t h a t banks are more l e n i e n t i f you miss a payment, o r r e f e r r e d t o o t h e r advantages o f banks. I n o t h e r words, i n t h i s second a r e a o f i n q u i r y people were a g a i n q u i t e e x p l i c i t i n e x p r e s s i n g t h e i r f a v o r a b l e a t t i t u d e s toward banks. Econoraic Behavior Program -14- Survey Research Center Table 6 I n f o r m a t i o n about C r e d i t Sources A v a i l a b l e t o D e a l e r s A. By Income Sources o f C r e d i t All Urtder $3000 $3000 -4999 Banks o n l y in 14% 18% 19% 18% 20% F i n a n c e companies o n l y 31 22 31 38 42 31 1 1 1 1 1 1 Two o r t h r e e among t h e 3 above 14 8 18 16 18 17 Car d e a l e r s , c a r m a n u f a c t u r e r s 7 6 7 7 5 10 Banks and c a r d e a l e r s 2 1 2 2 3 3 Finance companies & c a r d e a l e r s 4 3 3 5 3 3 O t h e r source 1 1 1 * 1 1 23 44 19 12 9 14 1007o 100% 100% 100% 100% 100% C r e d i t unions only Don't know; n o t a s c e r t a i n e d Total B. Income $5000 $7500 -7499 -9999 $10,000 and over By Debt Size o f M o n t h l y Payments None Under $50 $50 - 99 $100 or over Banks o n l y 18% 15% 18% 17% F i n a n c e companies o n l y 27 36 35 43 1 1 * * Two o r t h r e e among t h e 3 above 13 14 20 16 Car d e a l e r s , c a r m a n u f a c t u r e r s 7 7 6 8 Banks and c a r d e a l e r s 2 2 2 Finance companies & c a r d e a l e r s 4 3 5 4 O t h e r source 1 * 1 * 27 22 13 12 100% 100% 100% 100% C r e d i t unions only Don't know; n o t a s c e r t a i n e d Total * Less than o n e - h a l f o f one p e r c e n t . The q u e s t i o n was: "When a buyer makes c r e d i t arrangements t h r o u g h a c a r d e a l e r , who a c t u a l l y lends t h e money? Survey Research Center -15- Economlc 6 e h a v i 6 r Progfam Table 7 Preferences f o r Sources o f F i n a n c i n g Arranged t h r o u g h Car Dealer Income $7500 $5000 -7499 -9999 All Under $3000 $3000 -4999 487. 307. 54% 59% 61% 51% D e f i n i t e l y p r e f e r finance companies 2 1 3 2 4 3 Have p r e f e r e n c e , n o t c l e a r f o r which source 6 6 7 5 3 5 One might perhaps be concerned a l i t t l e 3 2 1 2 2 2 No p r e f e r e n c e 25 26 22 24 26 29 Don't know 11 26 8 6 3 5 9 5 2 1 5 100% 100% 100% D e f i n i t e l y p r e f e r banks Not a s c e r t a i n e d Total 5 1007. 100% $10,000 and over 100% The q u e s t i o n s were: "(As you s a i d ) c a r d e a l e r s make arrangements t o f i n a n c e a c a r w i t h f i n a n c e companies and sometimes w i t h banks; would you say t h a t t h e c a r buyer should be concerned w i t h whom the d e a l e r makes t h e arrangement? Do you have a p r e f e r e n c e ? " 3. Car I n s u r a n c e and I n s t a l l m e n t Buying I f the a u t o m o b i l e i n s u r a n c e i s handled i n c o n j u n c t i o n w i t h the arrangement f o r the f i n a n c i n g o f t h e c a r , an i m p o r t a n t source o f revenue i s opened up t o s a l e s f i n a n c e companies and c a r d e a l e r s . i s a c o n v e n i e n t arrangement A t the same t i m e , t h i s t o t h e auto p u r c h a s e r , who may handle a l l a r - rangements i n c o n n e c t i o n w i t h t h e purchase o f h i s c a r a t the o f f i c e o f the car dealer r a t h e r than a t t h r e e or f o u r separate places. The f i r s t q u e s t i o n t o be asked i n t h i s area a g a i n concerns level of information. We people's f i n d i n Table 8 t h a t on the whole people a r e w e l l informed about t h e f a c t t h a t f i n a n c e companies (and c a r d e a l e r s ) handle car insurance. Only among low-income people i s l a c k o f i n f o r m a t i o n f r e q u e n t , and o n l y r e l a t i v e l y few people m o d i f y t h e i r o p i n i o n by adding t h a t some f i n a n c e companies handle i n s u r a n c e w h i l e o t h e r s do n o t , o r t h a t f i n a n c e companies h a n d l e o n l y t h a t f o r m o f a u t o m o b i l e i n s u r a n c e w h i c h serves t o cover t h e b a l ance due. C u r r e n t a u t o d e b t o r s who n a t u r a l l y a r e r e c e n t a u t o purchasers are b e t t e r i n f o r m e d t h a n people who have no c a r debt. F o l l o w i n g t h i s i n q u i r y respondents were asked whether i t makes any d i f f e r e n c e whether a c a r buyer a r r a n g e s t h e i n s u r a n c e t h r o u g h the c a r d e a l e r o r by g o i n g d i r e c t l y t o an i n s u r a n c e company. p o r t i o n o f those who Among i n f o r m e d people the pro- s a i d t h a t i t does make a d i f f e r e n c e and o f those s a i d t h a t i t does n o t make a d i f f e r e n c e was c e n t as shown i n Table 9 ) . who f a i r l y s i m i l a r (37 and 31 per Yet t h e two p r o p o r t i o n s a r e most a l i k e among lower income groups ( l e s s than $5000 income). Most o f those who say t h a t i t makes a d i f f e r e n c e b e l i e v e t h a t i t I s more advantageous f o r the c a r buyer t o arrange f o r t h e i n s u r a n c e by g o i n g d i r e c t l y t o an i n s u r a n c e company. -16- -17- When people who expressed t h i s o p i n i o n were asked t o t e l l why they thought so, t h e f o l l o w i n g d i s t r i b u t i o n o f reasons was o b t a i n e d : B e t t e r t o Arrange Insurance t h r o u g h I n s u r a n c e Company than t h r o u g h Car Dealer because: Per Cent o f E n t i r e Sample I t i s cheaper 9 Know what you a r e g e t t i n g , can arrange f o r coverage as needed 5 Can 4 s e l e c t i n s u r a n c e company one wants Can g e t b e t t e r coverage 2 I n a d d i t i o n , o f c o u r s e , t h e r e were many p e o p l e who c o u l d n o t e x p l a i n o p i n i o n and j u s t r e p o r t e d their t h e i r judgment t h a t i t i s b e t t e r t o d e a l w i t h who a r e i n s u r a n c e s p e c i a l i s t s r a t h e r than w i t h a c a r d e a l e r . those Some few r e - spondents s p e c i f i c a l l y r e f e r r e d t o a d v e r t i s e m e n t s w h i c h , so t h e y s a i d , make i t c l e a r t h a t i t i s advantageous t o d e a l d i r e c t l y w i t h a u t o m o b i l e insurance companies. The f a i r l y s m a l l p r o p o r t i o n o f people who thought t h a t i t i s b e t t e r t o handle t h e c a r i n s u r a n c e t h r o u g h t h e a u t o m o b i l e d e a l e r used v e r y s i m i l a r arguments. surance Three p e r c e n t o f a l l people from a c a r dealer. more c o n v e n i e n t . s a i d t h a t i t i s cheaper t o buy i n - S l i g h t l y over one p e r c e n t s a i d t h a t t h i s i s fiurvej? ReseafeH Center Economic Behavior Progifam -18Table 8 Knowledge o f whether Car D e a l e r s and Finance Companies Handle Car Insurance A. By Income All _ Under $3000 $3000 -4999 Car d e a l e r s and f i n a n c e companies handle car insurance 56% 36% 61% 66% 71% 68% Some handle i n s u r a n c e , some don't 4 2 4 6 7 5 They handle o n l y i n s u r a n c e on c a r s t o cover balance due 2 * 2 1 1 1 Do n o t handle c a r insurance 10 12 12 9 7 5 D o n 1 know 23 43 18 14 10 14 5 7 3_ 4 4 7 100% 100% 100% 1 Not a s c e r t a i n e d Total B. Income $5000 $7500 -7499 -9999 100% 100% $10,000 and o v e r 100% By Debt Size o f M o n t h l y Payments None Under $50 $50 - 99 $100 o r o v e r Car d e a l e r s and f i n a n c e companies handle car insurance 50% 58% 74% 67% Some handle i n s u r a n c e , some don't 3 3 10 9 2 3 They handle o n l y i n s u r a n c e on c a r s t o cover balance due Do n o t handle c a r i n s u r a n c e 12 9 6 9 Don't know 29 24 6 11 6 4 1 4 Not a s c e r t a i n e d Total 100% 100% 100% 100% *Less t h a n o n e - h a l f o f one p e r c e n t . The q u e s t i o n was: "As you p r o b a b l y know, c a r s bought on t h e i n s t a l l m e n t p l a n must be i n s u r e d . Do you happen t o know whether t h e c a r d e a l e r s and f i n a n c e companies handle t h e insurance o f c a r s o r does t h e buyer have t o go d i r e c t l y t o an i n s u r a n c e company?" Survey Research Center Economic Behavior Program -19- Table 9 Preference f o r A r r a n g i n g Automobile Insurance t h r o u g h Car Dealer o r Insurance Company $10,000 and over All $3000 -4999 37% 26% 34% 48% 44% 46% (30) (19) (28) (40) (36) (36) (6) (4) (6) (7) (5) (1) (2) (2) (1) (5) 23 37 31 40 33 44 26 19 16 19 Yes, t h e r e i s a d i f f e r e n c e B e t t e r t h r o u g h an i n s u r a n c e company Income $5000 $7500 -7499 -9999 Under $3000 B e t t e r through the car dealer (and/or f i n a n c e company) (5) Not c l e a r w h i c h i s b e t t e r (2) No d i f f e r e n c e 31 Don't know 28 Not a s c e r t a i n e d Total 4 100% 7 100% 3_ 100% 2_ * 100% 100% 2_ 100% * Less than o n e - h a l f o f one p e r c e n t . The q u e s t i o n was: "Does i t make any d i f f e r e n c e whether a c a r buyer arranges the i n surance t h r o u g h t h e c a r d e a l e r o r t h r o u g h an insurance company? Which would you say i s b e t t e r ? " 4. D i f f e r e n c e s Among Finance Companies What do the American people know o f the sales f i n a n c e companies t h r o u g h w h i c h a s u b s t a n t i a l p r o p o r t i o n o f c a r buyers f i n a n c e t h e i r purchases? Do they t h i n k t h a t the f i n a n c e companies a r e a l l a l i k e o r t h a t they f r o m each o t h e r ? the people. The differ As can be seen I n T a b l e 10 b o t h o p i n i o n s are p r e s e n t among o p i n i o n t h a t t h e r e are no d i f f e r e n c e s among f i n a n c e companies i s much more widespread than the o p i n i o n t h a t t h e r e are d i f f e r e n c e s . i s e s p e c i a l l y t r u e among low-income p e o p l e and among people who n o t make any a t present do i n s t a l l m e n t payments on t h e i r c a r . When the 31 per c e n t o f a l l p e o p l e who t h i n k t h a t t h e r e are ences among f i n a n c e companies were asked t o t e l l how f r o m one This another, differ- these companies d i f f e r the f o l l o w i n g answers were o b t a i n e d : D i f f e r e n c e s Among Finance Companies Per Cent o f E n t i r e Sample C a r r y i n g charges d i f f e r 13 D i f f e r e n c e s i n r e p u t a t i o n ; some are more r e p u t a b l e than o t h e r s 6 Treatment o f c l i e n t s d i f f e r s 5 D i f f e r e n c e s i n s i z e o f down-payment or i n l e n g t h o f c r e d i t 1 I n a d d i t i o n , c l o s e t o o n e - t h i r d o f the group c o u l d n o t e x p l a i n f i n a n c e companies d i f f e r from one how another. A r e a d i n g o f the i n t e r v i e w s r e v e a l s t h a t i n the minds o f most people the d i f f e r e n c e s do n o t seem s u b s t a n t i a l . Among people w i t h c o l l e g e education and h i g h income, i t i s q u i t e u s u a l t o f i n d an acknowledgment o f the existence o f d i f f e r e n c e s about w h i c h one q u e r i e s ; d e n y i n g d i f f e r e n c e s may of information. -20- imply lack -21- Survey respondents were asked whether they had heard o f any f i n a n c e companies, and those who r e p l i e d i n t h e a f f i r m a t i v e were asked t o mention the names o f those companies t h e y had h e a r d o f . The r e s u l t o f t h i s inquiry as p r e s e n t e d i n Table 11 i n d i c a t e s c l e a r l y t h a t f i n a n c e companies a r e n o t w e l l known. A l t h o u g h 77 p e r c e n t o f t h e sample s a i d t h a t t h e y have heard o f f i n a n c e companies, 13 p e r c e n t c o u l d n o t r e c a l l any names. An a d d i t i o n a l v e r y l a r g e group, namely 30 p e r c e n t o f a l l , mentioned names o f f i r m s which were p r i m a r i l y engaged i n businesses o t h e r than a u t o m o b i l e f i n a n c i n g . The most f r e q u e n t l y mentioned among them were l o a n companies w h i c h s p e c i a l i z e i n cash l o a n s (Household F i n a n c e , B e n e f i c i a l , and t h e l i k e ) and f r e q u e n t l y advertise. Only 34 p e r c e n t o f a l l people mentioned one o f t h e f o u r l e a d i n g companies engaged i n a u t o m o b i l e f i n a n c i n g . j u s t one company r a t h e r t h a n s e v e r a l . Most o f these people mentioned The t a b l e shows t h a t t h e General Motors Acceptance C o r p o r a t i o n was by f a r t h e most f r e q u e n t l y r e p o r t e d name. I t should be added t h a t t h e r e p l y "General M o t o r s " was c o n s i d e r e d an a c c e p t a b l e r e p l y and coded under GMAC. Spontaneous r e c a l l o f names r e p r e s e n t s , o f c o u r s e , a severe t e s t . People may be q u i t e f a m i l i a r w i t h a c o r p o r a t i o n w i t h o u t b e i n g a b l e t o r e c a l l i t s name a t a g i v e n t i m e . A second t e s t t h e n c o n s i s t e d o f p r e s e n t i n g respon- dents w i t h a c a r d on w h i c h f i v e names were l i s t e d . People were asked, "Would you p l e a s e t e l l me w h i c h o f these you have heard o f ? " The f i v e names con- s i s t e d , i n a d d i t i o n t o t h e f o u r l e a d i n g companies, a f i c t i t i o u s name, made up f o r t h i s purpose. Ten p e r c e n t o f t h e p e o p l e r e c o g n i z e d t h e "U. S. Finance ^ Company." The r e s u l t s o f t h e r e c o g n i t i o n t e s t as shown i n Table 12 were s i m i l a r t o t h e spontaneous r e c a l l t e s t . The percentages were, o f c o u r s e , much h i g h e r , r o u g h l y t h r e e times as h i g h i n each i n s t a n c e . companies remained unchanged. But t h e r a n k o r d e r o f t h e f o u r -22- The f i n a l i n q u i r y i n t h i s s e r i e s was d i r e c t e d toward f i n d i n g o u t which companies people b e l i e v e t o be h i g h l y t h o u g h t o f . People who recog- n i z e d t h e name o f a t l e a s t two, sometimes t h r e e , s a l e s f i n a n c e companies were asked w h i c h o f these were h i g h l y thought o f i n t h e i r o p i n i o n . was d i r e c t e d t o 44 p e r c e n t o f t h e sample. This inquiry W i t h v e r y few e x c e p t i o n s people mentioned o n l y one s i n g l e company as b e i n g h i g h l y t h o u g h t o f . Overwhelmingly, as shown i n Table 13, t h i s company was t h e General Motors Acceptance tion. Corpora- Since t h e s t a r t i n g p o i n t o f t h i s i n q u i r y c o n s i s t e d o f t h e d i s t r i b u t i o n s presented i n Table 12, i t c o u l d n o t be expected t h a t t h e new q u e s t i o n would yield very d i f f e r e n t results. Survey kesearch Center -23- Economic Behavior Program Table 10 O p i n i o n s about D i f f e r e n c e s among Finance -Companies Size o f Monthly Payments All None There a r e d i f f e r e n c e s 31% 28% There a r e no d i f f e r e n c e s 48 Don't know Not ascertained Total The q u e s t i o n was: $50 - 99 $100 o r over 30% 40% 42% 46 53 48 43 18 22 16 11 12 3 4 1 1 3 100% 100% Under $50 100% 100% 100% "Do you t h i n k t h e r e a r e d i f f e r e n c e s among f i n a n c e companies o r a r e they a l l a l i k e ? Survey Research Center -24- Economic B e h a v i o r Program Table 11 Spontaneous R e c a l l o f Names o f Finance Companies Heard and named one o f f o u r 347„— GMAC and o t h e r ( s ) 25 CIT and o t h e r ( s ) 9 Commercial C r e d i t and o t h e r ( s ) 7 A s s o c i a t e s and o t h e r ( s ) 4 Heard and mentioned names o t h e r than above 30 Heard b u t u n a b l e t o name any 13 Heard o f no f i n a n c e companies 23 Total 1007. 1 / S u b t o t a l s add t o more than 347. because a few respondents mentioned two o r more f i n a n c e companies. The q u e s t i o n s were: "Have you heard o f any f i n a n c e companies? heard o f ? " Which have you Survey Research Center -25- Economic Behavior Program Table 12 Recognition o f Names o f Finance Companies Heard and named one o f f i v e 72%^ GMAC and o t h e r ( s ) 65 CIT and o t h e r ( s ) 27 Commercial C r e d i t and o t h e r ( s ) 20 A s s o c i a t e s and o t h e r ( s ) 13 U. S. Finance and o t h e r ( s ) 10 Heard o f no f i n a n c e companies 24 Not a s c e r t a i n e d 4 Total 100% 1/ S u b t o t a l s add t o more t h a n 727, because respondents mentioned f i n a n c e companies. The q u e s t i o n was: several "Here a r e t h e names o f a few f i n a n c e companies. Would you p l e a s e t e l l me w h i c h you have heard o f ? " Survey Research Center -26- Economic Behavior Program Table 13 H i g h l y Thought o f Finance A. Companies By Income Under $3000 All $3000 -4999 * Income $7500 $5000 -9999 -7499 $10,000 and over Associates alone Commercial C r e d i t alone U. S. Finance a l o n e U n i v e r s a l CIT alone GMAC a l o n e A s s o c i a t e s and o t h e r s Two o r more o t h e r s None Don't know; n o t a s c e r t a i n e d 2 17 2 11 1 8 1 9 1 6 1 10 2 20 2 12 1 8 1 24 2 12 2 7 3 18 4 '21 1 3 2% 1 2 16 3 14 1 15 Question n o t a s k e d ^ 56 70 52 50 46 46 100% 100% 100% 100% 100% 100% Total 1% 2 * B. 1% 2 2% * * 1% 1 * 1% 3 * By Debt Size o f Monthly Payments None Associates alone Commercial C r e d i t a l o n e U. S. Finance alone U n i v e r s a l CIT alone GMAC alone A s s o c i a t e s and o t h e r s Two o r more o t h e r s None Don't know; n o t a s c e r t a i n e d Question n o t asked-^ Total Under $50 $50 - 99 1% 2 * 1 14 1 9 1 9 62 * * 2 18 3 12 2 6 55 1 24 4 16 1 8 43 100% 100% 100% * 2% 1% 2 $100 or over 3% * * 4 30 5 21 1 7 29 100% * Less than o n e - h a l f o f one p e r c e n t . 1/ Because respondent heard o f no f i n a n c e company o r o n l y one. The q u e s t i o n was: "Which o f t h e ones you have heard o f a r e h i g h l y thought o f ? " 5. A t t i t u d e s Toward I n s t a l l m e n t C r e d i t I n an a n a l y s i s o f the p r o s p e c t s o f s a l e s f i n a n c e companies, i t i s o f course n o t enough t o s t u d y t h e i r c o m p e t i t i v e p o s i t i o n . Even b e f o r e we r a i s e the q u e s t i o n about the r e s p e c t i v e shares o f s a l e s f i n a n c e companies and banks i n the volume o f consumer i n s t a l l m e n t c r e d i t , we must d i s c u s s the problem o f i n s t a l l m e n t b u y i n g i t s e l f . We now t u r n t o an a n a l y s i s o f t h i s problem, namely, consumer a t t i t u d e s toward b u y i n g on i n s t a l l m e n t as a g a i n s t p a y i n g cash. T h i s i s a p r o b l e m w h i c h the Survey Research Center has s t u d i e d i n some d e t a i l over the p a s t f i f t e e n y e a r s . World War The f i n d i n g s o b t a i n e d s h o r t l y a f t e r I I as w e l l as i n r e c e n t y e a r s can be expressed i n t h e f o l l o w i n g statement: Buying on. i n s t a l l m e n t i s n o t something t o l e r a t e d as an u n d e s i r a b l e n e c e s s i t y b u t i s something f u l l y accepted and even l i k e d by broad p o p u l a t i o n groups. are To be s u r e , t h e r e are people opposed t o i n s t a l l m e n t b u y i n g and o t h e r s whose e v a l u a t i o n o f i n s t a l l m e n t b u y i n g i s a c a u t i o u s one. there But these people may be expected t o d e c l i n e i n number, t o a l a r g e e x t e n t because o f t h e i r demographic characteristics. Older people have always been one o f t h e s i g n i f i c a n t groups i n w h i c h o p p o s i t i o n t o i n s t a l l m e n t b u y i n g was frequent; when such opponents pass away they a r e o f t e n r e p l a c e d by people who In their m i d d l e age thought f a v o r a b l y o f i n s t a l l m e n t b u y i n g and m a i n t a i n e d t h i s o r i e n t a t i o n even when t h e y advanced i n age. I n the f i r s t few y e a r s a f t e r f a m i l y f o r m a t i o n a t t i t u d e s toward i n s t a l l m e n t c r e d i t are u s u a l l y f a v o r a b l e ; t h e r e f o r e y e a r a f t e r year new a d h e r e n t s o f i n s t a l l m e n t c r e d i t e n t e r t h e market. The o v e r - a l l t r e n d o f a t t i t u d e s toward i n s t a l l m e n t c r e d i t over t h e p a s t few y e a r s i s shown i n Table 14. I t i s seen t h e r e t h a t t h e major change i n the p a s t t h r e e y e a r s was an i n c r e a s e i n t h e p r o p o r t i o n o f adherents a t the expense o f undecided p e o p l e . The change d u r i n g the p a s t t h r e e y e a r s i s -27- -28- t r a c e d t o t h e v a r i o u s income groups i n Table 15 and t o p o p u l a t i o n groups d i v i d e d a c c o r d i n g t o t h e e x t e n t o f t h e i r indebtedness i n Table 16. I t can be seen from Table 15 t h a t i n s t a l l m e n t c r e d i t i s l e a s t p o p u l a r among those w i t h t h e l o w e s t and h i g h e s t Incomes, b u t t h e Increase i n p o p u l a r i t y has extended t o a l l Income groups. A c c o r d i n g t o Table 16 i n s t a l l m e n t b u y i n g i s opposed most commonly by those who had no i n s t a l l m e n t d e b t . c a u s a t i o n may have r u n i n e i t h e r o f two d i r e c t i o n s : N a t u r a l l y , the Because o f t h i n k i n g u n f a v o r a b l y o f i n s t a l l m e n t c r e d i t some people may n o t have made use o f i t ; a l t e r n a t i v e l y , because o f n o t n e e d i n g i n s t a l l m e n t c r e d i t and n o t making use o f i t , people may speak d e p r e c a t i n g l y o f i t . I t i s i l l u m i n a t i n g t o f i n d o u t what people have i n mind when they say t h a t i t i s a good i d e a o r a bad idea t o buy t h i n g s on t h e i n s t a l l m e n t plan. A f t e r respondents have made t h i s c h o i c e i n t h e i n t e r v i e w , they were asked t h e simple q u e s t i o n , "Why do you t h i n k so?" I n answer t o t h i s q u e s t i o n p r a c t i c a l l y a l l respondents e x p l a i n e d t h e i r o p i n i o n s i n d e t a i l i n s e v e r a l surveys (Table 1 7 ) . Most o f those who s a i d t h a t i n s t a l l m e n t b u y i n g i s a good idea e x p l a i n e d t h a t t h i s i s t h e r i g h t way f o r b u y i n g t h i n g s . t o pay f o r t h i n g s w h i l e u s i n g them. I t i s good They s t r e s s e d t h a t they and many o f t h e i r r e l a t i v e s , f r i e n d s and n e i g h b o r s c o u l d n o t buy t h e t h i n g s they needed i f i t were n o t f o r b u y i n g on t i m e . P r a c t i c a l l y a l l t h e 48 p e r c e n t o f people who i n November 1959 s a i d so worded t h e i r answers i n a way w h i c h i n d i c a t e d t h e i r approval o f i n s t a l l m e n t buying. Those who a r e opposed t o i n s t a l l m e n t c r e d i t ( s a y t h a t i t i s a bad i d e a ) f a l l i n t o t h r e e major groups. grounds; t h e y do n o t b e l i e v e i n debt. Some a r e opposed t o c r e d i t on m o r a l Some say a v a i l a b i l i t y o f i n s t a l l m e n t c r e d i t induces people t o buy t o o much; i n t h e i r eyes i n s t a l l m e n t c r e d i t has an adverse e f f e c t on t h e f i n a n c i a l p o s i t i o n o f many f a m i l i e s . Finally, a f a i r l y c o n s t a n t p r o p o r t i o n o f p e o p l e , about one o u t o f every s i x , says t h a t i n s t a l l m e n t c r e d i t i s t o o expensive. -29- What k i n d o f purchases do consumers have i n mind when they say t h a t i t i s a good idea o r a bad idea t o buy " t h i n g s " on t h e i n s t a l l m e n t plan? They speak p r i m a r i l y o f a u t o m o b i l e s , household a p p l i a n c e s , and o f f u r n i t u r e . But i t i s n o t enough t o r e l y on such spontaneous r e f e r e n c e s t o v a r i o u s goods, and t h e r e f o r e t h e Survey Research Center proceeded t o ask s p e c i f i c q u e s t i o n s r e g a r d i n g a v a r i e t y o f p o s s i b l e uses o f c r e d i t . d i f f e r e n t m a t t e r s were mentioned As seen i n Table 18, e i g h t t o t h e r e s p o n d e n t s , b o t h i n 1957 and 1959, and r e g a r d i n g each o f them t h e q u e s t i o n was asked whether " i t i s a p p r o p r i a t e for someone l i k e y o u r s e l f t o borrow money" f o r those purposes. (Frequently people who buy an a u t o m o b i l e on time do n o t c o n s i d e r t h a t they a r e b o r r o w i n g money. T h e r e f o r e t h i s e x p r e s s i o n was n o t used i n t h e f i r s t q u e s t i o n on i n - stallment c r e d i t . Y e t t h e e x p r e s s i o n c o u l d be used a f t e r respondents had a l r e a d y answered s e v e r a l q u e s t i o n s about i n s t a l l m e n t b u y i n g . ) I t can be seen from Table 18 t h a t t h e r e a r e two overwhelmingly approved purposes o f c r e d i t . Only v e r y few people say t h a t t h e y would n o t borrow money t o cover expenses due t o i l l n e s s . Most people answer "yes t o 11 t h i s q u e s t i o n w h i c h , t h e y t h i n k , i m p l i e s a necessary purpose f o r b o r r o w i n g - even though, i n f a c t , i n case o f i l l n e s s t h e y would r o w i n g money. t r y h a r d t o a v o i d bor- To f i n a n c e e d u c a t i o n a l expenses i s a s o c i a l l y a c c e p t a b l e purpose w h i c h a g a i n r e c e i v e s an overwhelming a f f i r m a t i v e answer even though such b o r r o w i n g I s done today by v e r y few people. To f i n a n c e t h e purchase o f a c a r appears a somewhat more a p p r o p r i a t e purpose f o r b o r r o w i n g than t o f i n a n c e t h e purchase o f f u r n i t u r e . To pay b i l l s w h i c h have p i l e d up i s a more a c c e p t a b l e purpose than t o cover l i v i n g expenses when income i s c u t . of Only a v e r y s m a l l p r o p o r t i o n o f people approve b o r r o w i n g t o cover t h e expenses o f a v a c a t i o n t r i p , and s t i l l fewer approve o f b o r r o w i n g t o f i n a n c e t h e purchase o f a f u r c o a t o r j e w e l r y . people -30- The rank o r d e r g i v e n t o t h e v a r i o u s purposes i s q u i t e s i m i l a r i n the v a r i o u s income groups as shown i n supplementary t a b l e s . I t i s a l s o shown t h e r e t h a t most respondents d e s i g n a t e d two, t h r e e , f o u r , o r f i v e purposes as a p p r o p r i a t e purposes f o r b o r r o w i n g . One o f the c r u c i a l q u e s t i o n s has been r a i s e d b e f o r e when we stated t h a t i n s t a l l m e n t c r e d i t i s n o t seen s i m p l y as an u n a v o i d a b l e n e c e s s i t y . This statement i m p l i e s t h a t some people- a t l e a s t would buy on i n s t a l l m e n t even i f they had t h e necessary cash and c o u l d a v o i d b o r r o w i n g . More g e n e r a l l y , our statement i m p l i e s t h a t i n c o n s i d e r i n g t h e two a l t e r n a t i v e s , b u y i n g a l a r g e t i c k e t i t e m now on the i n s t a l l m e n t p l a n o r d e l a y i n g t h a t purchase f o r s e v e r a l months u n t i l the necessary cash i s accumulated, v e r y many people choose the f i r s t one. Repeatedly i t has been shown f r o m p a s t Surveys o f Consumer F i - nances t h a t people have purchased on the i n s t a l l m e n t p l a n even though the money t h e y had i n savings o r c h e c k i n g accounts would have s u f f i c e d t o pay f o r the respective a r t i c l e . I n November 1959 t h i s p r o b l e m was s t u d i e d by a s k i n g the respondents the f o l l o w i n g q u e s t i o n s : " Speaking o f b u y i n g a c a r on t i m e , Mr. Smith has j u s t done so a l t h o u g h he has enough money i n the bank t o pay cash; why do you t h i n k he bought the c a r on time? What k i n d o f a man i s he?" The answers a r e p r e s e n t e d i n Tables 19 and 20 and show t h a t o n l y a s m a l l p r o p o r t i o n of people f a i l e d t o u n d e r s t a n d t h e b e h a v i o r o f Mr. Smith o r c h a r a c t e r i z e d him as a s t u p i d o r f o o l i s h man. A c c o r d i n g t o Table 19 d e r o g a t o r y remarks about Mr. Smith were made by 17 p e r c e n t o f a l l p e o p l e , n e u t r a l remarks o r i n a b i l i t y t o express an o p i n i o n about Mr. Smith by 31 per c e n t ( t h i s p r o p o r t i o n i n c l u d e s , o f c o u r s e , many p o o r l y educated people who c o u l d n o t express t h e i r thoughts), w h i l e complimentary s t a t e m e n t s about Mr. Smith were made by 52 per c e n t . S i m i l a r l y , we f i n d i n Table 20 t h a t no fewer t h a n 68 per c e n t o f t h e people c o u l d f i n d a m e a n i n g f u l reason w h i c h e x p l a i n e d t o t h e i r satisfaction why Mr. Smith bought h i s c a r on t i m e even though he had enough money i n t h e -31- bank t o pay cash. The most f r e q u e n t o f these reasons was, o f c o u r s e , the money i n t h e bank was earmarked f o r something else. that Liquid reserves i n the form o f bank accounts a r e seen p r i m a r i l y as r e s e r v e s f o r a r a i n y day; therefore, t h e y should n o t be used f o r p a y i n g f o r t h e c a r . should be k e p t i n t a c t , so v e r y many people s a i d . f u r t h e r arguments a t t r i b u t e d t o Mr. Smith. stallment Bank accounts Of i n t e r e s t a r e t h r e e One i s t h a t by b u y i n g on t h e i n - p l a n one e s t a b l i s h e s c r e d i t ; another i s t h a t by b u y i n g on c r e d i t r a t h e r than p a y i n g cash one g e t s b e t t e r s e r v i c e , sometimes even t h a t one gets a b e t t e r p r i c e ; and f i n a l l y , 5 p e r c e n t s a i d i n essence t h a t i t i s d i f f i c u l t t o replace savings. I n o t h e r words, a f t e r p a y i n g cash f o r a c a r one i s n o t under any p r e s s u r e t o r e p l e n i s h t h e d e p l e t e d bank d e p o s i t s . But a f t e r b u y i n g on i n s t a l l m e n t one must make t h e m o n t h l y payments o u t o f income so t h a t a f t e r a couple o f y e a r s one owns a c a r on w h i c h t h e r e i s no debt and s t i l l has one's untouched l i q u i d reserves. The data c l e a r l y i n d i c a t e t h a t these reasons a t t r i b u t e d t o Mr. Smith a r e viewed by t h e m a j o r i t y o f people as s u f f i c i e n t reasons, approved o f by t h e respondents. A person who a c t s t h a t way and buys on t h e i n s t a l l - ment p l a n i s c h a r a c t e r i z e d as i n t e l l i g e n t , as i n f o r m e d , as one who p l a n s ahead, o r as c a u t i o u s and c o n s e r v a t i v e much more f r e q u e n t l y than as a wise guy, o r as a p a r t i c u l a r l y smart o r shrewd f e l l o w . Survey Research Center Economic Behavior Program -32- Table 14 A t t i t u d e s toward I n s t a l l m e n t Buying I n s t a l l m e n t Buying i s - Jan-Feb. 1954 Aug. 1956 Nov-Dec. 1957 Nov. 1959 Good i d e a 50% 51% 55% 60% Pro-con, don't know 10 15 9 7 Bad 37 33 35 32 idea Not a s c e r t a i n e d Total The q u e s t i o n was: 3_ 100% 1 100% 1_ 100% 1 100% "As you know many people buy t h i n g s on t h e i n s t a l l m e n t p l a n these days. Do you p e o p l e t h i n k i t i s a good i d e a or a bad i d e a t o buy t h i n g s on t h e i n s t a l l m e n t p l a n ? " Economic Behavior Program -33- Survey Research Center Table 15 A t t i t u d e s toward I n s t a l l m e n t Buying by Income November 1959 . Under $3000 $3000 -4999 Income $5000 -7499 $7500 -9999 $10,000 and over I n s t a l l m e n t Buying i s - All Good idea 607. 55% 64% 63% 62% 56% 7 10 5 6 5 8 32 33 30 31 32 36 1 2 1 * 1_ * 100% 100% 100% 100% Pro-con; don't know Bad idea Not a s c e r t a i n e d Total 100% 100% August 1956 Good Idea 51% 49% 50% 55% 58% 44% Pro-con; don't know 15 14 14 14 16 19 Bad idea 33 36 35 30 26 36 Not a s c e r t a i n e d 1 1 1 1 * 1 Total 1007. F o r q u e s t i o n , see Table 14. 100% 100% 100% 100% 1007. Survey Research Center -34- Economic Behavior Program Table 16 A t t i t u d e s toward I n s t a l l m e n t B u y i n g by Size o f Debt November 1959 S i z e o f Monthly Payments I n s t a l l m e n t Buying i s Good i d e a Pro-con; don't know Bad i d e a Not ascertained Total None Under $50 $50 - 99 $100 - 499 50% 74% 71% 64% 8 5 9 8 41 20 20 28 * * 1_ 1__ 100% 100% 100% 100% August 1956 Size o f I n s t a l l m e n t Debt None Under $100 $100 - 499 $500 - 999 $1000 and over 40% 64% 64% 65% 68% Pro-con; d o n t know 16 15 13 16 15 Bad idea 43 20 23 19 17 Not a s c e r t a i n e d 1 1 * * * Total 100% 100% Good i d e a f * Less t h a n o n e - h a l f o f one per c e n t . F o r q u e s t i o n , see Table 14. 100% 100% 100% Survey Research Center Economic Behavior Program -35- Table 17 Reasons f o r A t t i t u d e s toward I n s t a l l m e n t Buying Jan-Feb. 1954 Favorable Factors: Can't buy w i t h o u t b o r r o w i n g , can use goods w h i l e p a y i n g Aug. 1956 Nov-Dec. 1957 Nov. 1959 37% 45% 43% 48% Helps e s t a b l i s h c r e d i t 5 5 3 4 Helps save 3 2 2 1 B e t t e r s e r v i c e i f you s t i l l owe money 3 2 1 1 14 18 17 14 5 5 4 4 16 16 14 15 L i k e l y t o buy t o o much 8 16 10 10 Don't b e l i e v e i n debt 11 11 9 9 1/ 1/ 1/ 1/ Depends: On how deeply you are i n d e b t , whether you can make t h e payments On what you buy o r on who buys Unfavorable Factors: Costs t o o much Total 17 Adds t o more t h a n 100 p e r c e n t because respondents c o u l d mention more t h a n one reason. The q u e s t i o n s were: "As you know, many people buy t h i n g s on t h e I n s t a l l m e n t p l a n these days. Do you t h i n k i t i s a good i d e a o r a bad idea t o buy t h i n g s on t h e i n s t a l l m e n t plan? Why do you t h i n k so?" Survey Research Center -36- Economic Behavior Program T a b l e 18 P r o p o r t i o n o f F a m i l i e s Who Say They Would Borrow f o r V a r i o u s Purposes To cover expenses due t o i l l n e s s To f i n a n c e e d u c a t i o n a l expenses To f i n a n c e t h e purchase o f a c a r To f i n a n c e t h e purchase o f f u r n i t u r e 1957 1959 1957 1959 1957 1959 1957 1959 Yes , would borrow 86% 86% 68% 70% 64% 67% 49% 44% No, would n o t borrow 13 13 30 28 35 31 49 54 1 1 2 1 2 2 2 Not a s c e r t a i n e d Total 100% 100% 2_ 100% 'To pay b i l l s w h i c h have p i l e d up 100% To cover l i v i n g expenses when income i s c u t 100% 100% To cover t h e expenses o f a vacation t r i p 100% 100% To f i n a n c e t h e purchase o f a f u r coat o r j e w e l r y 1957 1959 1957 1959 1957 1959 Yes,, would borrow 48% 44% 24% 26% 5% 5% No, w o u l d n o t borrow 50 54 74 72 93 94 96 97 2 2 2 1 2 1 Not a s c e r t a i n e d Total The q u e s t i o n was: 2_ 2_ 100% 100% 100% 100% 100% 100% 1957 2% 100% 1959 2% 100% "People borrow f o r many d i f f e r e n t purposes. For what purposes would you say i t i s a p p r o p r i a t e f o r someone l i k e y o u r s e l f t o borrow money which you pay back over time? (The respondent was s p e c i f i c a l l y asked about each o f t h e e i g h t purposes.) l u f - r e y Research Center -37- Economic Behavior Program Table 19 D e s c r i p t i o n o f Person Who Buys on t h e I n s t a l l m e n t Plan a l t h o u g h He Has S u f f i c i e n t Cash Income $5000 $7500 -7499 -9999 All Under $3000 $3000 -4999 I n t e l l i g e n t ; i n f o r m e d ; p l a n s ahead 30% 22% 28% 33% 40% 35% Wise guy; smart; shrewd 11 8 15 11 6 12 Cautious, conservative 11 7 8 15 17 11 Impatient; impulsive; extravagant 1 1 1 1 1 1 Does n o t c a l c u l a t e ; n o t good w i t h money; p o o r l y i n f o r m e d 4 4 4 4 7 7 S t u p i d ; unwise; f o o l i s h ; c r a z y 12 13 14 11 9 9 O t h e r , average, o r d i n a r y 10 10 8 12 9 13 D o n 1 know 15 27 15 8 7 7 6 8 5 4 5 1 Not a s c e r t a i n e d Total For q u e s t i o n , see Table 20. 100% 100% 7_ 100% 100% 100% $10,000 and over 100% Bv.rvey Research Center -38- Economic Behavior Program Table 20 Reasons A t t r i b u t e d t o Person Who Buys on t h e I n s t a l l m e n t Plan a l t h o u g h He Has S u f f i c i e n t Cash Income $5000 $7500 -7499 -9999 All Under $3000 $3000 -4999 42% 40% 41% 47% 51% 35% Wanted cash f o r something e l s e 9 9 11 7 9 12 D i f f i c u l t t o r e p l a c e savings 5 2 5 6 8 7 To e s t a b l i s h c r e d i t 6 4 6 7 8 6 Better service; better price 5 2 4 8 5 5 Use c a r w h i l e p a y i n g 1 * 1 1 1 * Other 9 7 10 9 6 22 Only d e r o g a t o r y s t a t e m e n t s ; no r e a s o n 7 8 8 5 3 2 14 25 12 8 8 7 2 3 2 2_ 1 4 Tonkeep bank account f o r emergencies, i n t a c t D o n 1 know 1 Not ascertained Total 100% 100% 100% 100% 100% $10,000 and over 100% * Less than o n e - h a l f o f one p e r c e n t . The q u e s t i o n s were: "Speaking o f b u y i n g a c a r on t i m e , Mr. Smith has j u s t done so a l t h o u g h he has enough money i n t h e bank t o pay cash. Why do you t h i n k he bought t h e c a r on time? What k i n d o f a man i s he?" 6. The Cost o f I n s t a l l m e n t C r e d i t I n v i e w o f t h e r e c e n t sharp i n c r e a s e i n i n t e r e s t r a t e s , i t i s o f p a r t i c u l a r importance t o d e t e r m i n e what people know o f t h e c o s t o f i n s t a l l m e n t credit. W i t h o u t answering t h i s query i t i s n o t p o s s i b l e t o determine whether changes i n i n t e r e s t r a t e s have any e f f e c t on i n s t a l l m e n t b u y i n g . Do people know how much i t c o s t s t o buy on t h e i n s t a l l m e n t plan? T h i s q u e s t i o n was asked i n t h e survey. Respondents were g i v e n a s p e c i f i c example ("Suppose you need a thousand d o l l a r s w h i c h you would repay monthly over two y e a r s " ) , so t h a t t h e y c o u l d answer e i t h e r i n terms o f percentages o r costs i n d o l l a r s . A t t e n t i o n was g i v e n t o o b t a i n i n g t h e c o s t f o r one year. As can be seen i n Table 2 1 , 39 p e r c e n t o f a l l people d i d n o t give an answer f r o m which a p r e c i s e e s t i m a t e o f t h e c o s t o f i n s t a l l m e n t c r e d i t c o u l d be d e r i v e d . Many o f t h e s e people s a i d s i m p l y t h a t t h e y d i d n o t know, w h i l e some o t h e r s gave such wide ranges a s , f o r i n s t a n c e , "Oh, between 5 and 15 per c e n t a y e a r " which c o u l d n o t be used. These people a r e most f r e q u e n t i n lower income groups among people who have no d e b t , among people w i t h e d u c a t i o n , and among Negroes, as shown i n supplementary t a b l e s . little Yet even among people w i t h incomes over $10,000 t h e frequency o f those who confess t h a t they do n o t know how much i n s t a l l m e n t c r e d i t c o s t s i s as h i g h as 32 p e r c e n t , among people who a r e now making l a r g e m o n t h l y payments i t i s as h i g h as 24 p e r c e n t , and among people w i t h a c o l l e g e degree i t i s as h i g h as 28 p e r c e n t . As can be seen i n T a b l e 2 1 , 61 p e r c e n t o f t h e sample made f a i r l y s p e c i f i c estimates o f the cost o f i n s t a l l m e n t c r e d i t : 23 p e r c e n t s a i d that the c o s t i s 6 p e r c e n t p e r y e a r o r l e s s , 22 p e r c e n t p l a c e d t h e c o s t between 7 and 12 p e r c e n t , and 16 p e r c e n t a t 13 p e r c e n t o r h i g h e r . O b v i o u s l y many people b e l i e v e t h a t t h e c o s t o f i n s t a l l m e n t b u y i n g i s lower t h a n i t a c t u a l l y is. Are these r e l i a b l e o p i n i o n s ? -39- -40- On p r a c t i c a l l y any i t e m o f knowledge o r i n f o r m a t i o n we f i n d that high-income people, people w i t h c o l l e g e e d u c a t i o n , and people w i t h p e r s o n a l experience i n t h e m a t t e r s t u d i e d a r e b e t t e r Informed t h a n o t h e r people. T h i s i s n o t borne o u t r e g a r d i n g t h e c o s t o f i n s t a l l m e n t c r e d i t . ^ We f i n d that 31 p e r c e n t o f people w i t h more than $10,000 income, l i k e w i s e 31 p e r c e n t o f people w i t h a c o l l e g e e d u c a t i o n , and l i k e w i s e 31 p e r c e n t o f people who make m o n t h l y payments o f over $100 p l a c e t h e c o s t o f i n s t a l l m e n t c r e d i t a t 6 per under (see supplementary t a b l e d . On t h e whole, v a r i o u s p o p u l a t i o n groups have q u i t e s i m i l a r n o t i o n s about t h e c o s t o f i n s t a l l m e n t c r e d i t . The one e x c e p t i o n perhaps i s t h a t on t h e average Negroes p l a c e t h e c o s t o f i n s t a l l m e n t c r e d i t h i g h e r than w h i t e s . The c o n c l u s i o n t o be drawn from these f i n d i n g s i s t h a t i n v e r y many i n s t a n c e s we a r e d e a l i n g w i t h uninformed how much i n s t a l l m e n t c r e d i t c o s t s . guesses. Many people have no idea When t h e q u e s t i o n i s asked o f them, they m e n t i o n some percentages w i t h w h i c h t h e y a r e f a m i l i a r and w h i c h seem approp r i a t e t o them. I f people a r e uninformed about t h e c o s t o f i n s t a l l m e n t c r e d i t even though they buy on t h e i n s t a l l m e n t p l a n , I t f o l l o w s t h a t they do n o t care much about t h e c o s t . T h i s n o t i o n i s borne o u t by t h e f i n d i n g p r e v i o u s l y r e - p o r t e d t h a t o n l y one o u t o f every s i x persons complained about t h e c o s t o f i n s t a l l m e n t buying. Very many people b e l i e v e t h a t t h e advantages o f b u y i n g on time a r e so l a r g e t h a t a few d o l l a r s d i f f e r e n c e r e s u l t i n g from h i g h e r o r lower i n t e r e s t r a t e s do n o t m a t t e r . According t o these f i n d i n g s , t h e n , i n - stallment c r e d i t i s insensitive t o fluctuations i n the i n t e r e s t rate. (On t h e o t h e r hand, mortgage c r e d i t , and house b u y i n g i n g e n e r a l , was found t o be r e t a r d e d by r i s i n g i n t e r e s t r a t e s . ) -41- Other s t u d i e s have shown t h a t h i g h e r I n t e r e s t r a t e s have no n o t i c e a b l e e f f e c t on t h e r a t e o f s a v i n g . I n o t h e r words, most people a r e n o t induced t o r e f r a i n from e x p e n d i t u r e s and t o save more by a somewhat g r e a t e r r e t u r n a v a i l a b l e on bank d e p o s i t s . B u t d i f f e r e n t i a l s i n i n t e r e s t r a t e s have induced many people t o s h i f t t h e i r r e s e r v e funds, f o r i n s t a n c e , from commercial banks t o savings and l o a n a s s o c i a t i o n s ( o r , more r e c e n t l y , i n t o such government n o t e s and b i l l s as t h e "magic f i v e s " ) . garding installment c r e d i t . A s i m i l a r s i t u a t i o n may p r e v a i l r e - W h i l e t h e r a t e o f a u t o m o b i l e b u y i n g on c r e d i t i s n o t much i n f l u e n c e d by a s m a l l i n c r e a s e i n c a r r y i n g charges, people's n o t i o n s about d i f f e r e n c e s i n c a r r y i n g charges appear t o i n f l u e n c e t h e i r c h o i c e o f t h e i n s t i t u t i o n f r o m w h i c h t h e y borrow. SUfvey Research Center -42- Economtc Behavior Program Table 21 E s t i m a t e o f I n t e r e s t on $1000 Repaid M o n t h l y over 2 Years Estimate o f I n t e r e s t per Year Under 47. All 27. Under $3000 $3000 -4999 17. 37. Income $5000 -7499 37. $7500 -9999 17. $10,000 and over 1% 4 - 67. 21 7 21 26 38 30 7 - 97. 9 6 10 10 13 10 10 - 127. 13 10 14 14 17 14 13 - 157. 3 2 3 5 2 3 16 - 207. 6 5 7 8 5 8 217. and over 7 9 8 6 5 2 31 52 24 21 13 22 Not a s c e r t a i n e d 8 8 10 7 6 10 Total 1007. 1007. 1007. 1007. 1007. D o n t know o r uncodable answer 1 The q u e s t i o n was: 1007. "Do you happen t o know how much i n t e r e s t o r c a r r y i n g charges one has t o pay t o buy a c a r on t i m e ; suppose you need a thousand d o l l a r s w h i c h you would repay m o n t h l y over 2 y e a r s ; about how much do you t h i n k t h e i n t e r e s t o r c a r r y i n g charges would be each y e a r ? " Appendix: The Methodology n a t i o n w i d e sample I n t e r v i e w surveys conducted by the Survey Research Center a r e c a r r i e d o u t i n 66 p r i m a r y sampling u n i t s (composed o f a c o u n t y o r group o f c o u n t i e s ) , i n c l u d i n g 12 o f t h e l a r g e s t m e t r o p o l i t a n areas and 54 o t h e r sampling u n i t s s e l e c t e d by p r o b a b i l i t y methods from a l l t h e non- metropolitan counties i n the United States. Within the selected primary s a m p l i n g u n i t s , c i t i e s , towns, o r o p e n - c o u n t r y segments a r e s e l e c t e d , then c i t y b l o c k s , and f i n a l l y d w e l l i n g u n i t s - - a l w a y s by a process o f random s e l e c tion. nately. I n the s e l e c t e d d w e l l i n g u n i t s , husband and w i f e a r e i n t e r v i e w e d alter- The i n t e r v i e w e r s a r e c a r e f u l l y t r a i n e d ; they a r e n o t p e r m i t t e d t o s u b s t i t u t e respondents n o r t o d e v i a t e f r o m w o r d i n g and sequence o f t h e ques- t i o n s prepared. Even t h e b e s t conducted surveys a r e s u b j e c t t o e r r o r s . respondents r e f u s e Some s e l e c t e d t o be i n t e r v i e w e d , o r a r e n o t found a t home i n s p i t e o f r e p e a t e d c a l l s , o r a r e s i c k , o r do n o t speak E n g l i s h . Altogether, interviews were completed w i t h 85 p e r cent o f t h e s e l e c t e d respondents i n t h i s survey. Sampling e r r o r s a r i s e because a sample r a t h e r t h a n t h e e n t i r e p o p u l a t i o n has been i n t e r v i e w e d . The s i z e o f t h e s a m p l i n g e r r o r s i s shown i n Tables 29 and 30. F o r many i m p o r t a n t d a t a p r e s e n t e d i n t h i s r e p o r t , sampling errors--and survey e r r o r s i n g e n e r a l - - c a n be d i s r e g a r d e d because t h e d i f f e r e n c e s as shown i n t h e t a b l e s exceed by f a r any p o s s i b l e range of errors. For instance^we see from T a b l e 2B t h a t 5 p e r c e n t o f t h e sample s a i d t h a t a person who made t h e c r e d i t arrangements w i t h a c a r d e a l e r is intelli- gent o r i n f o r m e d , w h i l e 47 p e r c e n t o f t h e same sample s a i d so about a person who made t h e c r e d i t arrangements w i t h a bank. A d i f f e r e n c e o f f o u r percentage p o i n t s between t h e two f i n d i n g s would have s u f f i c e d t o make t h e d i f f e r e n c e s t a t i s t i c a l l y s i g n i f i c a n t a t t h e 95 p e r c e n t p r o b a b i l i t y l e v e l ; i n f a c t , t h e d i f f e r e n c e was 42 p e r c e n t . -43- -44- To be s u r e , t h e r e a r e numerous t a b l e s i n which the d i f f e r e n c e s are much s m a l l e r . The s i z e o f t h e sampling e r r o r depends on the number o f cases on which a g i v e n s t a t i s t i c i s based, and i s t h e r e f o r e h i g h e r f o r subgroups o f t h e sample than f o r t h e e n t i r e sample. For i n s t a n c e , i n Table 21 we f i n d , i n comparing two f a i r l y s m a l l c e l l s , t h a t among people w i t h over $10,000 income 31 p e r c e n t and among people w i t h an income between $7500 and $10,000 a year 39 p e r c e n t e s t i m a t e d t h e c o s t o f i n s t a l l m e n t c r e d i t a t 6 per c e n t o r l e s s per y e a r . at T h i s d i f f e r e n c e happens t o be on t h e b o r d e r l i n e o f s i g n i f i c a n c e the 95 p e r c e n t level. I n o r d e r t o make t h i s judgment, t h e r e a d e r needs t o know, i n a d d i t i o n t o t h e sampling e r r o r s p r e s e n t e d i n Table 30, t h e number o f cases which f o r m t h e b a s i s o f each s t a t i s t i c . They a r e p r e s e n t e d i n Table 3 1 . Supplementary Tables -45 Survey Research Center Economic Behavior Program Table 22 Assumed A c t i o n by Car Dealer i n Case o f D e f a u l t I f Mr. Jones who made arrangements w i t h t h e c a r d e a l e r cannot make a payment what w i l l happen? All S p e c i f i c d r a s t i c a c t i o n ; repossession; Income $5000 -7499 $7500 -9999 $10,000 and over Under $3000 $3000 -4999 437. 427. 457. 437. 447. 457. 3 3 2 3 3 3 17 14 16 21 18 14 4 2 3 4 5 6 17 14 22 16 21 15 N o t h i n g w i l l happen ,1 1 1 1 1 3 Depends on t h e c a r d e a l e r 3 3 3 4 5 6 12 21 8 8 3 8 100% 1007. 1007. lawsuit Take steps t o be sure they a r e c o l l e c t e d A c t i o n o n l y a f t e r delay Tougher t h a n bank An easy accommodation Don't know; n o t a s c e r t a i n e d Total 1007. 1007. 1007. 1 Economic Behavior Program Survey Research Center T a b l e 23 Assumed A c t i o n by Bank i n Case o f D e f a u l t Income $5000 -7499 $7500 -9999 $10,000 and over All Under $3000 $3000 -4999 15% 24% 16% 8% 9% 9% 2 1 2 2 3 5 13 9 15 17 11 14 1 * * * * 51 40 53 57 66 56 happen 2 * 2 2 3 3 Depends o n t h e bank 2 2 1 3 2 3 14 24 11 11 100% 100% 100% 100% I f Mr. Smith who went t o a bank cannot make a payment, what w i l l happen? S p e c i f i c d r a s t i c a c t i o n ; repossession Take s t e p s t o be s u r e t h e y c o l l e c t e d A c t i o n only a f t e r delay Tougher t h a n f i n a n c e company Easy accommodation; l o a n extended; r e a c h an agreement Nothing w i l l Not a s c e r t a i n e d ; don't know Total * Less t h a n o n e - h a l f o f one p e r c e n t . * 6_ 100% 10 100% Survey Research Center Economic Behavior Frogram Table 24 A p p r o p r i a t e Purposes f o r Borrowing $3000 -4999 Income $5000 -7499 $7500 -9999 $10,000 and over A p p r o p r i a t e Purposes f o r B o r r o w i n g All Under $3000 To cover expenses due t o i l l n e s s 86% 83% 86% 92% 86% 85% To f i n a n c e e d u c a t i o n a l expenses 70 56 74 74 81 83 To f i n a n c e t h e purchase o f a c a r 67 46 69 72 74 61 To f i n a n c e t h e purchase o f f u r n i t u r e 44 34 49 50 49 41 To pay b i l l s w h i c h have p i l e d up 44 45 48 41 39 40 To cover l i v i n g expenses when income i s c u t 26 33 26 22 21 23 5 3 5 6 8 5 2 3 2 2 3 3 ** ** ** ** irk ** To cover t h e expense o f a v a c a t i o n trip To f i n a n c e t h e purchase o f a f u r coat o r j e w e l r y ** Adds t o more than 100 p e r c e n t because respondents c o u l d m e n t i o n more t h a n one a p p r o p r i a t e purpose. For q u e s t i o n , see Table 18. Economic Behavior Program Survey Research Center Table 25 Number o f A p p r o p r i a t e Purposes f o r Borrowing Income Number o f A p p r o p r i a t e Purposes f o r B o r r o w i n g All None 57. One 8 Two 15 Three 24 Four 22 Five 17 Six 6 Seven 1 Eight 1 Not a s c e r t a i n e d 1 Total 1007. * Less t h a n o n e - h a l f o f one p e r cent. F o r q u e s t i o n , see Table 18. Under $3000 $3000-4999 $5000-7499 $7500-9999 $10,000 and over 10% 3% 2% 3% 4% 14 8 6 5 4 17 14 12 12 22 20 23 29 23 23 18 2: 24 35 23 12 2: 19 14 16 6 7 6 5 * 1 2 3 I * * 1_ * 100% 100% 100% 100% 100% Survey ReSeatsh Center Economic Behavior Program Table 26 E s t i m a t e o f I n t e r e s t on $1000 Repaid M o n t h l y over 2 Years, by Size o f Debt Size o f M o n t h l y Payments E s t i m a t e o f I n t e r e s t p e r Year Under 4% None 1% Under $50 2% $50 - 99 2% $100 o r over 47, 4 - 6% 17 22 34 27 9% 8 9 12 13 10 - 127. 14 10 13 22 13 - 15% 3 3 4 1 16 - 20% 6 7 8 4 217. and over 6 9 8 5 Don't know o r uncodable answer 35 31 13 20 Not ascertained 10 7 6 4 Total 100% 100% 10G7. 100% 1 - F o r q u e s t i o n , see Table 2 1 . Survey Research Economic Behavior Program Center Table 27 E s t i m a t e o f I n t e r e s t on $1000 Repaid M o n t h l y over 2 Years by E d u c a t i o n Estimate o f I n t e r e s t Per Year Grade s c h o o l ; none Under 4% Some h i g h school Education Completed h i g h school 3% 3% 1% Some college College degree 1% 1% / ^ s 4 - 6% 11 24 27 25 7 - 9% 6 8 11 15 12 10 - 12% r^ 1 2 , 11 13 18 r ~i4 13 - 15% ( 2 V 3 4 5 3 7 8 6 V_5 46 25 23 16 8 10 8 Not a s c e r t a i n e d Total ^ 7 2 1 % and over 1 4 7 16 - 20% D o n t know r 100% For q u e s t i o n , see Table 2 1 . j 100% 7_ 100% L 6 18 10 10 100% 100% > Economic Behavior Program Survey Research Center Table 28 E s t i m a t e o f I n t e r e s t on $1000 Repaid Monthly over . 2 Years by Race Race E s t i m a t e o f I n t e r e s t p e r Year Under 47. AH 27. White 27. Negro 47. 4 - 67. 21 22 11 7 - 97. 9 10 5 10 - 127. 13 13 9 13 - 157. 3 3 3 16 - 207. 6 6 6 217. and over 7 6 13 31 29 44 Not a s c e r t a i n e d 8 9 5 Total 1007. 1007. 1007. D o n t know 1 For q u e s t i o n , see Table 2 1 . Survey fteseftfcn Center Economic Behavior Program Table 29 Approximate Sampling E r r o r s o f Reported Percentages (Expressed i n Percentages) Number o f I n t e r v i e w s on Which Percentage I s Based Reported Percentage 1000 700 500 300 200 50% 3.8 4.5 5.2 6.7 8.2 30 o r 7G% 3.4 4.2 4.8 6.1 7.4 20 o r 80% 3.0 3.6 4.2 5.3 6.6 10 o r 90% 2.2 2.7 3.1 4.0 4.8 5 o r 95% 1.6 1.9 2.2 2.9 3.6 Survey Research Center Economic Behavior Program Table 30 Approximate Sampling E r r o r s o f D i f f e r e n c e s (Expressed i n Percentages) Size o f Sample o r Subgroup Size o f Sample o r Subgroup 1500 1000 700 500 300 200 For percentages from about 357« t o 657. 1500 4.5 1000 4.9 5.4 6.1 7.4 8.7 5.4 5.9 6.4 7.7 9.0 6.3 6.9 8.0 9.3 7.4 8.4 9.7 9.5 10.5 700 500 300 200 11.5 For percentages around 207. and 80% 1500 3.5 1000 3.9 4.4 4.8 6.0 6.9 4.3 4.6 5.2 6.1 7.2 5.1 5.5 6.4 7.4 6.0 6.7 7.8 7.6 8.4 700 500 300 200 9.2 For percentages around 10% and 907© 1500 1000 700 500 300 200 2.7 2.9 3.3 3.7 4.4 5.3 3.2 3.6 3.9 4.6 5.4 3.8 4.1 4.8 5.6 4.4 5.1 5.8 5.7 6.3 6.9 Survey Research Center Economic Behavior Program Table 31 Number o f Cases i n D i f f e r e n t C e l l s T o t a l sample « 1332 cases Income Groups Size o f M o n t h l y Payments Under $3000 365 cases None 753 casei $3000 - 4999 345 Under $50 288 $5000 - 7499 331 " $50 - 99 196 $7500 - 9999 146 " $100 o r over $10,000 and over 106 " Place o f Residence 77 Education Large m e t r o p o l i t a n c i t i e s 181 cases Grade school 471 Other l a r g e c i t i e s 227 " Some h i g h school 264 Suburban areas 353 " Completed h i g h school 289 Small towns 234 " Some c o l l e g e 134 R u r a l areas 337 " Has c o l l e g e degree 156 Race White Negro 1162 cases 140 " cases " 11
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