Abstract:

The goal of the article is to provide a critical analysis of the regulations, which are part of state economic protectionism, aimed at standardizing the so-called annual effective rate (EAR) for consumer loan. It is demonstrated in the article that regulatory activities may be ill-directed and thus far from optimal because of the poor financial knowledge of consumers. Authors’ contribution to the literature on the subject consists of an analysis of how consumers understand the concept of the effective rate. This analysis is performed on the basis of a survey conducted on a representative sample of adult Poles. The attention is drawn to huge inconsistency in the terminology regarding interest rates offered by the existing literature. It is shown that the nature of EAR is very ambiguous which does not support the use of EAR by consumers to make debt decisions. It is proved that people do not understand EAR. They associate it mainly with the total cost of a loan and do not understand the influence of the time value of money on EAR value. It is argued that consumers generally do not have a sufficient level of financial literacy, especially regarding interest rate definitions and calculations, to enable them to make informed, rational decisions, even with the support of state interventionism and regulatory actions. The results of this study indicate shortcomings in the current regulatory solutions on consumer credit market and, therefore, call for a remedy. Former researchers did not investigate relations between state economic protectionism on consumer credit market, regulation policies and financial literacy on metrics that regulation is aimed at.