Remembering to Pay? Reminders vs. Financial Incentives for Loan Payments

30 Pages Posted: 9 May 2011 Last revised: 29 Oct 2014

See all articles by Ximena Cadena

Ximena Cadena

Harvard University

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: May 2011

Abstract

We report the results from a field experiment with a micro lender in Uganda to test the effectiveness of privately implemented incentives for loan repayment. Using a randomized control trial we measure the impact of three different treatments: Borrowers are either given a lump sum cash reward upon completion of the loan (equivalent to a 25% interest rate reduction on the current loan), a 25% reduction of the interest rate in the next loan the borrower takes from the bank, or a monthly text message reminder before the loan payment is due (SMS). We find that on average the size of the treatment effect is similar across all the treatment groups: borrowers in the treatment groups have a 7-9% increase in the probability of paying on time and the average days late drop by 2 days a month. The results suggest that simple text messages which help borrowers to better manage their repayment dates have similar effects as large changes in the cost of capital of 25% of interest. The impact of the cash back incentives are stronger for customers with smaller loans and less banking experience, the reduced future interest rate seemed to be most effective for customers with larger loans, while the SMS text messages were particularly effective for younger customers.

Suggested Citation

Cadena, Ximena and Schoar, Antoinette, Remembering to Pay? Reminders vs. Financial Incentives for Loan Payments (May 2011). NBER Working Paper No. w17020, Available at SSRN: https://ssrn.com/abstract=1833157

Ximena Cadena (Contact Author)

Harvard University ( email )

Antoinette Schoar

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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National Bureau of Economic Research (NBER) ( email )

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