Credit Based On Trust And Good Looks

By Margarita Nahapetyan

It turns out that a person's appearance plays a significant role when it comes to financial lenders to decide whether a borrower is trustworthy enough for a credit or not, suggests a brand new study by the U.S. researchers at Rice University and the University of Washington.

The experts also discovered that a seemingly untrustworthy people are required to pay an interest rate nearly 2 per cent higher compared to individuals who are perceived to be trustworthy. Even when hard facts such as credit scores are available, lenders still rely on an assessment of trustworthiness in order to make a decision concerning lending money. In general, people who are worth trust, have better credit score and pay lower interest rates on loans, and are less likely to default, according to the researchers.

Jefferson Duarte, a professor of real estate finance at Rice University, and his colleagues Stephan Siegel and Lance Young, of the University of Washington in Seattle, analyzed data from Prosper.com, an online lending site which matches people looking for loans with those ready to lend money. For the study, the experts looked at more than 6,000 loan applications, 2,579 loans and 12,000 photographs available at Prosper.com. Each loan applicant had submitted a profile, which included credit profile, job history, level of education, and information about income. In addition, borrowers also included an optional photograph of themselves along with an explanation what they needed a loan for.

At that point, people who are willing to lend money, are able to view the profiles of all borrowers. Later, if they become interested in offering someone a loan, they place a bid for their business. If there are enough bids, the loan application is being filled, in other case, the application for getting a loan expires. Of the 6,821 applications used by the researchers, 733 were financed.

Next, Duarte involved a team of twenty-five people from Amazon.com's Mechanical Turk (MTurk), a site that brings together people who need a job done with people who are looking for work. MTurk workers were asked to rate the applicants' trustworthiness on a scale of 1 to 5, using only the photographic images of the borrowers. The team also had to judge the probability that individuals on the photos would pay a $100 loan back.

The MTurk team found that perceived trustworthiness of people who were in need of loans, correlated with their credit history ratings filed at Prosper.com. In other words, MTurk workers could distinguish people with higher credit scores from individuals with lower credit scores based solely on the photos. Those who seemed trustworthy to the team, were more likely to get a loan from Prosper.com lenders and tended to have a credit score about 20 points higher than those determined to be untrustworthy, the researchers wrote.

They also discovered that people who have been perceived as trustworthy, default on loans less often. "Untrustworthy" applicants were 7 per cent more likely to default on their loan than a perceived trustworthy borrower with the same credit score. "This implies that the pictures revealed something about borrower creditworthiness that is not accounted for in traditional credit scoring models," Duarte said.

According to expert, there is a lot of hidden information that can be taken out of the photographic image, and added that Prosper.com applicants most often submit pictures ranging from family portraits to photos of their pets. These pictures give better impression and ideas about the general behavior and habits of a person, features that cannot be seen in their credit history. To make sure that the prejudices of the "jury" did not influence the results, the researchers took into consideration factors such as race, age, gender, good looks, extreme weight and education, as well as financial factors like employment status, income and homeownership.

Understanding what determines trustworthiness may be relevant to the current economic crisis and be the key when it comes to restoring lost trust in the markets, Duarte said. "People do not trust the markets right now. People do not trust the banks, the banks don't trust themselves ... trustworthiness seems to be really important in every single transaction and we need to pay attention to this concept," he concluded.