Love & Loans: The Effect of Beauty and Personal Characteristics in Credit Markets

Abstract:     
I examine whether easily observable variables such as the personal characteristics of a loan applicant and the way he presents himself affect lenders' decisions, once hard financial information about credit scores, employment history, homeownership, and other financial information are taken into account. I study an online lending market in which 7,321 borrowers posted 11,957 loan requests that included verifiable financial information, photos, an offered interest rate, and related context. Borrowers whose appearance is rated above average are 1.41 percentage points more likely to get a loan and, given a loan, pay 81 basis points less than an average-looking borrower with the same credentials. Black borrowers pay between 139 and 146 basis points more than otherwise similar White borrowers. However, in my sample such personal characteristics are not, all else equal, significantly related to subsequent delinquency rates - with the exception of beauty, which is associated with substantially higher delinquency rates. The findings suggest that the mechanism through which personal characteristics affect loan supply is lenders' preferences and perception, rather than statistical discrimination, based on inferences from previous experience.

Keywords: Beauty, Credit Markets, Discrimination

JEL Classifications: G20, D10, J71

Working Paper Series