Looks Influence Creditworthiness, Study Finds

March 16, 2009: Chicago, IL:  "It turns out that if you look trustworthy, you're more likely to get a loan," said Jefferson Duarte, a professor of real estate finance at Rice University.   It also turns out that looks are a pretty good predictor of whether a person will repay a loan.

Duarte and co-researchers Stephan Siegel and Lance Young, of the University of Washington in Seattle, recently studied members of Propser.com, an online lending site that matches potential borrowers with individuals interested in making loans as an investment.

According to the study's summary statement, the researchers wanted to consider the impact of trustworthiness on financial markets at the level of an individual borrower. They found that, "borrowers who are perceived as untrustworthy are economically and significantly less likely to have their loan requests filled, even controlling for physical attractiveness, detailed demographic information, credit profile, income, education, employment and loan-specific information."

According to the study, a borrower perceived as untrustworthy must pay a promised interest rate that was 182 basis points higher than those who looked trustworthy, no matter their credit score or repayment history.

More than 6,800 loan applications, 2,579 loans and 12,200 photographs from Prosper.com were used in the study.  Controls were maintained to avoid gender, age, homeownership and race bias.

For the study, the researchers hired a team of 25 people to rate each applicants' trustworthiness on a scale of one to five using only the photographs of the borrowers.  The team also judged the probability that the borrowers would repay a $100 loan.

Those judged to be trustworthy by the team were more likely to get a loan from actual Prosper.com lenders. 

Interestingly, the researchers found that those who looked trustworthy tended to have a credit score about 20 points higher than those determined to be untrustworthy.  Similarly, "untrustworthy" borrowers were seven percent more likely to default on their loan than a perceived trustworthy borrower with the same credit score.

Prosper.com borrowers frequently use photographs of themselves, their family and even their pets as part of their application, an indication that applicants may sense a need to go beyond the details they provide to appear more human, and therefore more trustworthy.

The research study was undertaken in part to help determine the degree that trustworthiness may be relevant to the current economic crisis.  The results suggest that not only do individuals need to appear trustworthy, for institutions to succeed in an competitive, difficult market, they too must appear trustworthy.

Posted by Mark Rodrigues at 3/16/2009 8:25 AM
Categories: Psychology
 

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