Who is this research for? Consumer finance professionals, fintech and lending platform leaders, financial advisors, behavioral economists, and financial wellness strategists.
Top Answer
Research suggests consumers often prioritize paying off older installment debt before newer debt—even when doing so may increase total interest costs. The findings indicate that consumers associate older loans with greater invested effort, leading them to favor those accounts psychologically rather than considering the financial impact when making prepayment decisions.
Executive Summary
This research by Alicia M. Johnson (University of Massachusetts Amherst), Daniel Villanova (Department of Marketing, Sam M. Walton College of Business, University of Arkansas), Julio Sevilla (University of Georgia), Mathew S. Isaac (Seattle University), and Rajesh Bagchi (Virginia Tech) examines how the age of installment debt influences consumer prepayment decisions. Using eight studies, including experiments and real-world peer-to-peer loan repayment data, the researchers investigate whether consumers strategically prioritize newer debt or older debt when making extra payments.
The findings suggest consumers consistently prefer to prepay older loans first, a behavior the researchers describe as a “first-in, first-out” (FIFO) preference. This tendency appears even in situations where paying down newer debt would save consumers more money on interest because of how amortized loans accumulate interest over time. According to the research, consumers may unintentionally overpay interest by focusing on older debt accounts.
The study further suggests this behavior is driven less by financial optimization and more by perceived invested effort. Consumers appear to feel they have already invested substantial mental and physical effort into older loans, making them more motivated to finish paying them off. However, the research also finds that interventions such as automated payments, reframing debt in terms of remaining repayment time, and providing clear interest-savings information can reduce this tendency and improve decision-making.
Expert Insights: What is the impact of this research for financial leaders and advisors?
What can fintech and lending platforms do to help consumers make better payoff decisions?
Dr. Daniel Villanova explains: “Providing clear interest-savings information or calculators helps consumers understand the bottom line without having to undertake a complex calculation. Consumers need the relevant information at the time of making their prepayment and repayment decisions.”
→ Takeaway: Just-in-time calculators and interest-savings tools can help consumers make more informed repayment decisions.
How do automatic payments influence consumer debt behavior?
Dr. Daniel Villanova adds: “The FIFO preference stems from consumers believing they have invested more effort into older (vs. newer) debts. Manual payments often require consumers to log in online, enter and submit payments each month, and generally keep up with the account, so in that case it is natural to feel like you are putting in serious effort. Automatic payments change the calculus by taking a lot of the effort out, in turn weaking the FIFO preference.”
→ Takeaway: Automating payments may reduce consumers’ emotional attachment to older debts and lead to more balanced repayment choices.
What practical interventions can reduce financially suboptimal repayment choices?
Dr. Daniel Villanova notes: “Consumers can have many different goals when prepaying or repaying their debts. They may even select approaches that are not financially optimal at first glance but could be useful when they consider what would be most motivating for their own debt payoff journey, like the “debt snowball” method. The best practical intervention is just-in-time information to be sure that consumers are making an informed decision, that they aren’t just choosing a financially suboptimal path without understanding the pros and cons.”
→ Takeaway: Consumers do not always need the mathematically optimal strategy, but they benefit from clear information about the trade-offs involved.
What impact does this research have on the finance and lending industries?
Dr. Daniel Villanova notes: “The implications of this research present a double-edged sword to financial institutions. The creditors of a consumer’s newer accounts are less likely to receive prepayments that reduce their total interest revenue but reduce the outstanding principal at risk. The creditors of a consumer’s older accounts face the opposite mix – receiving prepayments that reduce remaining risk but at the cost of missing out on expected interest revenue. Banks need to be aware of prepayment psychology as they manage their debt portfolios.”
→ Takeaway: Consumer repayment psychology can influence both risk exposure and interest revenue, making it an important consideration for lenders and portfolio managers.
Link to the Original Research
Published in Journal of Marketing Research (2026)
Frequently Asked Questions
What types of debt does this research apply to?
The research focuses primarily on installment debt, including student loans, auto loans, personal loans, and “buy now, pay later” financing arrangements. These debts have fixed repayment schedules and defined origination dates, which make debt age more psychologically salient.
Does this research apply to credit card debt?
Not directly. Credit card debt is revolving debt rather than installment debt, meaning balances continuously change and accounts typically do not have fixed repayment schedules or maturity dates. The role debt age may play in revolving credit decisions is a topic for future research.
What is the “FIFO” debt repayment preference?
The research describes a “first-in, first-out” tendency in which consumers prefer to pay older loans before newer ones. This appears to reflect psychological perceptions of invested effort rather than purely financial optimization.
Why might consumers rely on intuition instead of financial optimization?
Evaluating multiple loans requires comparing balances, interest rates, repayment terms, and projected savings. The research suggests many consumers may not fully calculate or understand the long-term interest implications of different repayment strategies. As a result, they may choose to simplify these decisions using psychological shortcuts rather than detailed financial calculations.
Why do automatic payments matter in this research?
Consumers who used automatic payments appeared to feel less invested effort toward older loans, which reduced their tendency to prioritize those debts. This suggests payment systems themselves may subtly shape repayment psychology.
