What do consumers know and understand about effective interest rates? Evidence from a debt literacy survey in Poland

Wiktor  Cwynar

doi:10.23762/FSO_VOL10_NO1_7

Published : 2022-03-30

Vol. 10 No. 1 (2022)

What do consumers know and understand about effective interest rates? Evidence from a debt literacy survey in Poland

Wiktor Cwynar

https://orcid.org/0000-0001-6890-5189

DOI: https://doi.org/10.23762/FSO_VOL10_NO1_7

Abstract

The key parameter in borrowing is the interest rate. However, research shows that many consumers have very low levels of debt literacy, including knowledge and understanding of effective interest rates. This article uses data obtained from a sample of 1,055 borrowers and a three-question debt literacy test to learn which properties of the effective interest rate notion and the calculation thereof are particularly difficult for consumers to comprehend. To this end, logistic regressions were applied which showed that, of the three aspects of the effective interest rate examined, the largest gaps in knowledge and understanding relate to the concept of the time value of money. Unlike the other two aspects, in this case knowledge gaps are more egalitarian – they affect women and men equally and they do not depend significantly on the level of education. Answers to the time value of money question are also differently related to non-cognitive factors compared to answers to the other two questions in the applied debt literacy test. Treating incorrect and “don’t know” responses as separate categories in multinomial regressions confirms these observations, but also suggests that each of these two response categories may convey different informational content.

Keywords:

effective interest rate, annual percentage rate, annual percentage yield, financial literacy, debt literacy, financial education, Poland

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Cwynar, W. . (2022). What do consumers know and understand about effective interest rates? Evidence from a debt literacy survey in Poland. Forum Scientiae Oeconomia, 10(1), 118–146. https://doi.org/10.23762/FSO_VOL10_NO1_7

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Wiktor Cwynar

wiktor.cwynar@wsei.lublin.pl
https://orcid.org/0000-0001-6890-5189

Affiliation:

University of Economics and Innovation Poland

Bio Statement (e.g., department and rank)

Wiktor Cwynar, Ph.D., is an Assistant Professor at Lublin School of Economics and Innovation, Poland. He is the CEO of the spin-off Splentum (www.splentum.pl). During his professional career, among others, he has held the following positions:–Head of Group Controlling at Grupa Azoty S.A., one of the biggest companies listed on the Warsaw Stock Exchange,–Secretary of Supervisory Board of GA Puławy S.A., a chemicals company listed on the Warsaw Stock Exchange,–Rector of Wyższa Szkoła Biznesu – National Louis University in Nowy Sącz,–Rector of Warsaw Higher School of Economics,–Member of Supervisory Board and Managing Board of CIECH S.A., one of the biggest companies listed on the Warsaw Stock Exchange,–Partner at the Polish Investment Fund,–Deputy Director of the Institute for Financial Research and Analyses,–Deputy Editor-in-Chief of e-Finanse Financial Internet Quarterly.His main fields of scientific interest are financial literacy, debt literacy, financial education and value-based management (VBM). He is the author of numerous scientific articles on fi-nance and VBM. He has also written two books, „Zarządzanie wartością spółki kapitałowej. Koncepcje – systemy – narzędzia (Company value management. Concepts – systems – tools)”, for which he was awarded the Polish Ministry of Education Award and which was nomi-nated for the Szczecin University Beta Prize and the Professor Bielski WSB-NLU Prize, and „Kreowanie wartości spółki poprzez długoterminowe decyzje finansowe (Creating company value through long-term financial decisions)”.