The price of money: Consumers' understanding of APRs and contract interestrates

Both the contract interest rate and the annual percentage rate indicate the price of a loan. Consumer's understanding of these two measures of the pri ce of closed-end consumer loans was examined using the 1997 University of M ichigan Survey of Consumers. Among the mortgage borrowers, at least 40% of respondents failed to understand the relationship between these two price m easures; education, quantity and quality of information search, and region were found to influence their understanding. The authors draw implications for improving information disclosure in consumer credit markets.