Beauty, Personal Characteristics, and Trust in Credit Markets

Abstract

This paper investigates the effect of personal characteristics and the way people present themselves on their likelihood of getting a loan, the terms of such loan, and whether these characteristics are correlated with future loan performance. After controlling for credit score, credit history, income, employment status, and homeownership, personal characteristics like beauty, race, appearing creditworthy, being overweight, or the context of the picture a borrower posts significantly affect the likelihood of getting a loan and/or the interest rate paid. Beautiful borrowers are 1.41 percent more likely to get a loan and 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 an otherwise similar White borrower. The borrower's personal characteristics do not appear to be significantly related to subsequent delinquency rates, with the exception of beauty that, all else equal, makes a borrower more than three times as likely to become delinquent. I also find that lenders' sophistication and personal characteristics such as gender, race, age and income affect their lending decisions. Similarity between borrowers and lenders also has a statistically significant and large economic effect on the terms of the loan, although it doesn't change the impact of the other explanatory variables. The setting of the study is a large U.S. online lending website.

Keywords: Trust, Credit Markets, Beauty

JEL Classification: G10, D12