PEOPLE BUYING FINANCIAL products online are being warned that “subtle features” in the sign up process could end up costing them money.

A new study by the Economic and Social Research Institute (ESRI) found that people applying for loans online are drawn to the default options presented to them, leading them to unknowingly make decisions that hurt their wallet.

Eoin McGee, of Prosperous Financial Services, welcomed the research on the grounds that “it puts it in people’s faces that banks are out to make money off them at every opportunity”.

“They’re not operating to make friends, they’re in it to make money off us,” he told TheJournal.ie.

The study, published in the Journal of Behavioural and Experimental Finance and part-funded by the Competition and Consumer Protection Commission (CCPC), cites the example of repaying a €10,000 loan secured online.

If the loan is repaid in one year it costs about €500 in interest, while repaying it over five years costs €2,500.

In the experiment, the length of loan that consumers chose depended on the default settings of the online calculator they used.

The researchers asked a representative sample of consumers to choose a personal loan using an online calculator and search tool, just like those now widely used in online banking.

Half of the consumers saw the initial repayment term set at five years, while the other half saw it set at one year.

On average, those served with the five-year repayment were swayed towards longer loan terms. This effect happened despite consumers changing the default setting to check other options.

“As online banking becomes more popular, our findings suggest that consumers should be wary of how their choices can be influenced,” Dr Shane Timmons, of the ESRI’s Behavioural Research Unit, said.

In our experiment some consumers selected loans that would ultimately cost them at least €500 more, simply because the calculator first showed them a five-year repayment term.

McGee said it should come as no surprise that banks can build applications in a manner that maximises profits.

“People should always approach these things with their eyes wide open. They should be aware that they can be influenced in this way. And people who don’t think they can be influenced are the most likely to be swayed,” he said.

The financial expert warned that a common trap consumers fall into is that they take out the loan over a longer period than the length of time they intend to pay it back.

This ends up costing more money as they don’t make extra payments and allow the loan to run its set course.

He advocates setting the length of the loan as close as possible to the length of time you can afford to pay it back over.

“Seeing the repayment amounts go up makes it feel more painful but it quickly saves money over the course of the loan,” he said.