This coming November, 2011, the “Journal of Marketing Research” will publish one of the year’s more groundbreaking research into what factors determine not only who is most likely to get a peer-to-peer personal loan funded but also who gets the best rates. The work is ground breaking because it’s not at all what you might think.
Using data from actual, real-world, peer-to-peer loans, a Rice University study titled “Tell me a good story and I may lend you my money: The role of narratives in peer-to-peer lending decisions” tells a fascinating story that underscores just how important personal factors are in social (or peer-to-peer) lending.
When lenders look at loan applications, they typically consider a wide range of objective factors including credit scores, loan type, credit history, and the purpose of the loan.
What the Rice study discovered, however, is that the weight of these objective factors can be greatly influenced by the personal narratives borrowers can choose to include with the loan application. Such a personal narrative, or story, functions much like the personal statement students include with their test scores and grades in college applications.
However, it’s more than just including a personal statement that improves one’s chances of getting a peer-to-peer loan funded. It’s what type of perception of the borrower the statement creates in the mind of the lender that makes the difference:
“For example, if a borrower acknowledged that he made mistakes in the past and defaulted on payments but amended his actions, makes payments on time and learned something in the process, his perceived trustworthiness as a borrower increases. As a result, the borrower improves his chance of securing a loan, despite the lack of hard evidence to support the claim that he learned from his past mistakes.”
(Good storytelling may trump bad credit).
And this is no small effect. The Rice study showed that when all other factors were held constant, loan applications that created a perception of trustworthiness had a 40% greater chance of being funded compared to loan applications that either had no personal statement or had a personal statement but didn’t suggest a trustworthy borrower.
Moreover, if lenders were given control over the loan’s repayment terms, a personal statement suggesting trustworthiness reduced loan interest rates by 30%.
Good Story Telling may Trump Bad Credit For Peer-to-Peer Personal Loans
So it’s clear that lenders are strongly influenced by such personal statements. But – is this rational or are peer-to-peer lenders just easily manipulated by a “good story”?
The Rice study strongly suggests there is a rational basis for this:
“By analyzing the accounts borrowers give and the identities they construct, we can predict whether borrowers will pay back the loan above and beyond more objective factors like their credit history.”
said Herzenstein, the lead researcher in the Rich Study.
While such a claim may strike readers as astounding, Herzenstein says nothing new is really going on here:
“In a sense, our results offer a method of assessing borrowers in ways that hark back to the earlier days of community banking when lenders knew their customers.”
The radical innovation of peer-to-peer lending is that it has moved an old and highly reliable way of doing business into an online world with technologies that support increasingly smarter web-based interactive platforms, all increasingly integrated into new social media technologies. The personal statement serves to reach through all that technology, and across vast distances, to ground the lending business relationship in the personal, in the felt and intuitive world where human beings evolved to interact.
Did you know that more and more people are turning to peer-to-peer personal loans to consolidate credit card debt? Given that peer-to-peer personal loans often have rates far lower than most bank loans and almost always much lower than most credit cards, a peer-to-peer personal loan is a superior way to consolidate credit card debt.
Peerform.com offers peer-to-peer loans starting at rates as low as 4.56%, typically far below the “too big to fail” banks and even many of the smaller community banks. We are one of the newest peer-to-peer loan providers licensed to operate in Arizona, Connecticut, Florida, Georgia, Illinois, Louisiana, Ohio, Maryland, Michigan, Virginia, and Washington. Check out Peerform.com today for your personal loan needs!