Thursday, January 30, 2014

Do Good Looking People Get Better Loan Terms?

See Love & Loans: The Effect of Beauty and Personal Characteristics in Credit Markets by Enrichetta Ravina of Columbia University (this is a technical paper). Here is the abstract or summary:
"I examine whether easily observable variables such as beauty, race, and the way a loan applicant presents himself affect lenders’ decisions, once hard financial information about credit scores, employment history, homeownership, and other financial information are taken into account. I use data from, a 150 million dollars online lending market in which borrowers post loan requests that include verifiable financial information, photos, an offered interest rate, and related context. Borrowers whose beauty 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, although they are not more likely to become delinquent. Similarity between borrowers and lenders has also a powerful impact on lenders’ decisions. In my sample 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 probability. The findings are consistent with personal characteristics affecting loan supply through lenders’ preferences (taste-based discrimination a la Becker) and perception, rather than statistical discrimination based on inferences from their previous experience."
81 basis points means that if the average looking person gets a loan for 5.81%, the good looking person would get it for 5%. If your loan is for $100,000, it means if you paid it back in a year, the good looking person would get to pay $810 less.

For a non-technical article about how peer-to-peer lending works, see It's Like eBay Meets Does peer-to-peer lending work? by Ray Fisman of Slate. Very entertaining.

Here are some earlier posts on the money value of looking good:

Do looks matter? 

Do Looks Help In The Job Market? 
From The Life Is Not Fair Category: Better Looking, Tall, Thin People Make More Money

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