When it comes to peer-to-peer micro loans, lenders are looking at more than a person’s credit history.
According to a recent study from the University of Delaware and Rice University, borrowers that include a story about their financial situation have a much better shot at getting money than borrowers that didn’t.
The researchers looked loan data on Prosper.com, a site where individuals can get loans between $2,000 and $25,000. When applying, a borrower has the option of including a narrative explaining past credit decisions and plans for the future.
It turned out including a narrative made a significant difference for acceptance rates. Sixty-five percent of applicants that included a narrative received a loan. For the applicants that didn’t include a narrative, only 45.8 percent received a loan.
“Sixty-five percent of applicants that
included a narrative received a loan.”
Including a narrative also influenced loan interest rates. The researchers organized the narratives as having six different possible themes: trustworthy, successful, economic hardship, hardworking, moral and religious.
If an applicant had a narrative with a trustworthy theme, it led to a significant loan discount. Borrowers gave a 30 percent discount to applicants with a trustworthy narrative, an average of $375 of savings per loan application.
While these narratives seem to help borrowers, they didn’t appear to help lenders.
Applications with trustworthy narratives did not have a significantly different default rate than other applications. The trustworthy theme didn’t seem to make borrowers any more honest.
However, if you are looking to borrow money through a peer-to-peer lending site, keep this study in mind. Taking a few minutes to craft a good story could be a big help for your financing.
Source: The University of Delaware and Rice University. Photo source: salon.com.