These days a bad credit score will get you turned away by a bank, but if you tell a good story about that score, you can improve your chances of getting a microloan from a peer-to-peer lender, according to new research from Rice University and the University of Delaware.
The researchers found that in peer-to-peer lending, unverifiable information such as personal narratives and explanations affected lending decisions above and beyond objective, verifiable information such as credit scores and histories.
In two new studies, researchers analyzed data from Prosper.com, America's first peer-to-peer lending marketplace with more than a million members; borrowers and lenders can connect there without going through a bank or institution. Borrowers choose a loan amount, purpose and post a loan listing. Then investors review loan listings and invest in those that meet their criteria. Once the process is complete, borrowers make fixed monthly payments and investors receive a portion of those payments directly to their Prosper account.
In the first study, the researchers – Scott Sonenshein and Utpal Dholakia from Rice University's Jones Graduate School of Business and Michal Herzenstein from the University of Delaware -- found that micro-lenders were more likely to offer loans to borrowers who explained, and then admitted or denied, the details of their credit history. For instance, a borrower increased her/his perceived trustworthiness and chance of securing a loan by telling a lender, "I missed several payments on my car loan, which led to an increased interest rate, but I'm paying on time now and have learned from my mistakes" even though there was no evidence to support the claim that the borrower learned from past mistakes. Indeed, 65.3 percent of all loan requests that included such similar statements were funded, compared with only 45.8 percent of the loans that did not include such statements.
"Despite a poor credit grade, the social accounts that borrowers give and identities they create can increase their chances of securing a loan," said Sonenshein, lead author of one of the studies and assistant professor of management. "But relying on those accounts and identities can actually lead lenders to make poorer decisions about which loans to fund."
For example, borrowers who explain their circumstance but deny the details – "The credit card company lost my payment and is now working to correct my credit report" – have the poorest loan performance. For example, 25 percent of the borrowers who make such claims are late with their payments or have already defaulted, while only 10.5 percent of borrowers who did not make such claims are late or have defaulted.
In the second study, Sonenshein and his co-authors analyzed the six different identities – trustworthy, successful, economic hardship, hardworking, moral and religious – that borrowers constructed for themselves in the loan application's optional essay. They found that borrowers in their sample could lower their costs by almost 30 percent and saved about $375 in interest charges by using a "trustworthy" identity.
Borrowers who claimed the "trustworthy" or "successful" identities also received higher loan funding than those who did not – 121 percent versus 82 percent. Those who described themselves as "religious" were less likely to get a loan.
According to the study, borrowers with lower credit grades constructed more identities to compensate for their objectively poor circumstances. The more identities the borrowers constructed, the more likely lenders were to fund the loan and reduce the interest rate but the less likely the borrowers were to repay the loan: 29 percent of borrowers with four identities defaulted, whereas 24 percent with two identities and 12 percent with no identities defaulted.
Claiming one additional identity decreased the final interest rate by 12.75 percent for the loans in their sample. So by claiming one identity, compared with zero, the borrower paid $177.98 less after three years on a loan of $8,305 -- the average loan requested within the dataset.
"By analyzing the reasons borrowers give and the identities they construct, we can predict payback status over and beyond more objective factors such as credit scores," Sonenshein said. "In a sense, it offers a way of assessing borrowers in ways that harp back to the earlier days of community banking when lenders knew their customers."
Further analysis showed that a "trustworthy" identity predicts that a loan will be paid back early, a "moral" identity predicts payment on time and an "economic hardship" identity predicts a default or late payment.
"Despite being authentic about their difficulties, the borrowers are using an 'economic hardship' identity to gain empathy, but it's a tactic lenders should view as a warning sign," Sonenshein said. "Ultimately, these borrowers lack either the ability or willingness to fulfill loan obligations."
The first study, "How Accounts Shape Lending Decisions Through Fostering Perceived Trustworthiness," was published in the December issue of Organizational Behavior and Human Decision Processes. The second study, "Tell Me a Good Story and I May Lend You My Money: The Role of Narratives in Peer-to-Peer Lending Decisions," will be published in November in the Journal of Marketing Research's special issue on consumer financial decision-making.
To interview Sonenshein or his co-authors, or to receive a copy of the studies for news purposes, contact David Ruth, director of national media relations, at firstname.lastname@example.org or 713-348-6327.
Located on a 285-acre forested campus in Houston, Rice University is consistently ranked among the nation's top 20 universities by U.S. News & World Report. Rice has highly respected schools of Architecture, Business, Continuing Studies, Engineering, Humanities, Music, Natural Sciences and Social Sciences and is known for its "unconventional wisdom." With 3,485 undergraduates and 2,275 graduate students, Rice's undergraduate student-to-faculty ratio is less than 6-to-1. Its residential college system builds close-knit communities and lifelong friendships, just one reason why Rice has been ranked No. 1 for best quality of life multiple times by the Princeton Review and No. 4 for "best value" among private universities by Kiplinger's Personal Finance. To read "What they're saying about Rice," go to http://futureowls.rice.edu/images/futureowls/Rice_Brag_Sheet.pdf
David Ruth | EurekAlert!
Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik
RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung
The more electronics steer, accelerate and brake cars, the more important it is to protect them against cyber-attacks. That is why 15 partners from industry and academia will work together over the next three years on new approaches to IT security in self-driving cars. The joint project goes by the name Security For Connected, Autonomous Cars (SecForCARs) and has funding of €7.2 million from the German Federal Ministry of Education and Research. Infineon is leading the project.
Vehicles already offer diverse communication interfaces and more and more automated functions, such as distance and lane-keeping assist systems. At the same...
A research team led by physicists at the Technical University of Munich (TUM) has developed molecular nanoswitches that can be toggled between two structurally different states using an applied voltage. They can serve as the basis for a pioneering class of devices that could replace silicon-based components with organic molecules.
The development of new electronic technologies drives the incessant reduction of functional component sizes. In the context of an international collaborative...
At the LASYS 2018, from June 5th to 7th, the Laser Zentrum Hannover e.V. (LZH) will be showcasing processes for the laser material processing of tomorrow in hall 4 at stand 4E75. With blown bomb shells the LZH will present first results of a research project on civil security.
At this year's LASYS, the LZH will exhibit light-based processes such as cutting, welding, ablation and structuring as well as additive manufacturing for...
There are videos on the internet that can make one marvel at technology. For example, a smartphone is casually bent around the arm or a thin-film display is rolled in all directions and with almost every diameter. From the user's point of view, this looks fantastic. From a professional point of view, however, the question arises: Is that already possible?
At Display Week 2018, scientists from the Fraunhofer Institute for Applied Polymer Research IAP will be demonstrating today’s technological possibilities and...
So-called quantum many-body scars allow quantum systems to stay out of equilibrium much longer, explaining experiment | Study published in Nature Physics
Recently, researchers from Harvard and MIT succeeded in trapping a record 53 atoms and individually controlling their quantum state, realizing what is called a...
25.05.2018 | Event News
02.05.2018 | Event News
13.04.2018 | Event News
25.05.2018 | Event News
25.05.2018 | Machine Engineering
25.05.2018 | Life Sciences