"No-Interest" Advertising in High-Cost Consumer Credit Markets

Abstract

This paper examines whether advertised cost claims that do not reflect total borrowing costs affect consumer choices and beliefs in expensive, short-term credit markets. We assemble a comprehensive dataset on cash-advance apps combining detailed advertising content, app downloads and usage, and actual borrowing costs. We find that apps charging high all-in costs tend to advertise "no-interest." These claims are particularly effective at increasing continued usage by existing users. Using a survey experiment, we show that these claims lead a substantial fraction of respondents to believe that total borrowing costs are zero, even after they have been shown the actual costs.

JEL Classification: G5, M3