Increasing savings among members seeking auto loan refinance

Background

Although most people refinance their loan to get a better interest rate, they may end up with a smaller monthly payment as well. They might use this additional money to help manage other expenses, but this is also an opportune time to begin building their savings. Research by Katherine Milkman and John Beshears suggest that, due to mental accounting, we often treat windfalls like bonus money, not giving much thought to where this extra money will be the most effective. The refinancing process might present a kind of “golden moment,” particularly for people who may not have already accounted for this surplus of money and therefore would find it easier to save a portion.

We partnered with Digital Federal Credit Union (DCU) to test whether we could nudge members to set up a recurring savings transfer as part of the refinancing process. Members with reduced monthly loan payments were encouraged to earmark a portion of the difference in monthly payments to be automatically transferred into a DCU savings account.

Key Insights

There are many reasons why someone might not save some or all of the difference in their monthly loan payment:

• Transferring a portion of this difference into their savings simply may not have occurred to members.

• Going through the process of setting up an automatic transfer is not necessarily easy and represents another step in the process at the moment of refinancing.

• The member may need or would prefer to have the difference in payment accessible for other expenses, rather than direct it to a savings account.

We sought to address these concerns by prompting members to set up an automatic transfer into savings. We predict that people refinancing an auto loan with DCU will be more likely to set up automatic transfers to savings when prompted to actively make a choice to save. We also predict that being prompted to save during the loan refinance process will result in increased savings behavior in the months following the intervention.

Experiment

To test these hypotheses, we worked with DCU to develop a system to prompt members to save during the refinance process. Half of DCU’s loan agents were randomly assigned to ask members whether they would like to set up an automatic transfer of either 25% or 50% of their monthly loan payment to savings (treatment group) while the other half of the loan agents did not provide this offer (control group). Note that if a member was randomized into the treatment group, they received the savings prompt from the loan agent only if they were saving $20 or more on their new monthly loan payment.

We expected that a significantly larger number of people in the treatment group would agree to set up an automatic transfer of a portion of their monthly loan payment savings due to the active choice nature of the offer provided, and that this automatic transfer would be maintained for at least 3 months following the set-up.

Results

We concluded enrollment in the experiment at the end of January 2020, with 843 DCU members going through the loan refinance process. We found that 16% of members who were offered to set up automatic transfers said yes, and the desired transfers ranged anywhere from 6% - 100% of their savings in monthly loan payment (mean of 55% and median of 50%). We then measured actual savings rates for three months after refinancing. Surprisingly, we found no difference in actual savings behavior between the control (business-as-usual) and the treatment (active savings prompt) group, in spite of the 16% of members who said yes to the automatic transfer.

Due to technical constraints, loan agents were not consistently able to set up automatic transfers for those who expressed interest, and instead gave members instructions for how they could set up the automatic transfers themselves. We believe this is why we saw no significant differences when comparing the change in average savings rates before and after the loan refinance between members in the control and treatment groups.

Although there were no differences in savings rates, the 16% of members who initially agreed to set up an automatic transfer during the loan refinance process, and the fact that some of them chose to save up to 100% of the difference in monthly loan payments, indicates that there is latent interest and motivation for saving in this context, but the hurdles and friction in setting up an automatic transfer themselves deterred that motivation.