دانلود رایگان مقاله انگلیسی بی سوادی مالی و تصمیمات بازپرداخت وام - الزویر 2018

We analyze the effect of an exogenous shock to the Italian mortgage market, where a reform has abolished prepayment fees and simplified mortgage refinancing, making it a virtually cost-free decision for households. This law, along with the considerable drop in market interest rates, has generated important gains for fixed-rate borrowers, which we quantify at up to 15 percent of the principal balance. Nevertheless, only about 13 percent of borrowers have locked in this opportunity. We study the relationship between this sluggish behavior and their level of financial literacy.

6. Conclusion

In February 2007 the Italian government passed new legislation on mortgages, granting households the right to refinance their loans at no cost, as prepayment fees and other costs associated with refinancing (e.g., notary fees, registration fees, etc.) were abolished. This reform, along with the substantial drop in interest rates which occurred in the following years, has endowed households with the opportunity to refinance fixed-rate mortgages with important gains, which we quantify at up to 15 percent of the principal balance. This figure corresponds to a €112 reduction of the monthly instalment and an overall annual saving slightly lower than the average monthly income in our sample (about €1.5k). Despite this benefit, the new legislation has turned out to be mostly unsuccessful, as only a modest minority of borrowers (about 13 percent) have taken advantage of this opportunity in the 8 and a half years since its introduction. We believe that the lack of borrowers’ ability to understand the law and a misjudged perception of its impact have a strong predictive power in explaining this suboptimal behavior. In fact, for individuals exhibiting a poor level of financial literacy, understanding the impact of the new reform and assessing the potential benefit exploitable is unlikely to be a trivial undertaking. In this paper we provide evidence that financial literacy as well as socio-demographic characteristics contribute to explaining why only a scant minority of households have captured this profitable opportunity. More specifically, we document that financial literacy, proxied by the presence of a college degree in finance or economics, or prior experience in bank products, increases the likelihood of a loan being refinanced. Consistent with previous literature, we provide evidence that suboptimal borrower behavior is positively associated with the less educated, the poor, immigrants, women, and households living in less developed areas of the country. Our findings convey policy implications. The effectiveness of a new reform for individuals should not be assessed without considering their actual understanding of the potential benefits. Conditional on the complexity of the reform, financial literacy is a crucial precondition for households to exploit these benefits. Investment in enhancing financial literacy is therefore essential, and should even come before legislative interventions in order to protect individuals from making sub-optimal economic decisions and financial mistakes.