Present Bias and Debt-Financed Durable Goods

It has become common to view credit as problematic for present-biased consumers, who are tempted to incur too much debt because of its deferred costs. But while this view is generally valid when debt is used to finance current consumption, the picture becomes much more nuanced when credit is used to fund the purchase of durable goods—such as houses, cars, and education—which is the most common use of consumer credit. When bundled with the purchase of a durable good, the deferred cost feature of credit can be a feature, not a bug. The reason is that durable goods provide deferred benefits that are also undervalued by present-biased consumers. Moreover, people often need to save in advance to finance the purchase of a durable good, and present-bias makes it difficult to save. As a result, people with present bias tend to underconsume durable goods. We show that the deferred costs of purchase debt can offset these barriers to buying durable goods and make the present-biased consumer better off both by tempting her to buy something that she should—but would not otherwise—buy and by making it easier to save up for the purchase. (JEL D90, K0, G51)