“No-Interest” Advertising in High-Cost Consumer Credit Markets
Prof. Xi Wu
Assistant Professor in Accounting
Haas School of Business
University of California, Berkeley
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.
