The way you write could impact what you pay for a loan
By Sofia Sanchez, Eller College of Management
A person’s writing style can help lenders determine which borrowers are most likely to default on a loan, new research shows.
Rick sias, a professor at the University of Arizona Eller College of Management, and his coauthors examined the writings of potential borrowers in a debt crowdfunding platform – where a large group of investors can lend money to a business or individual – to see if investors in an online marketplace use information captured by an individual’s writing style when making author decisions. They focused on three linguistic dimensions: readability, tone, and cues of deception.
âWe have found that in fact, writing style plays a role in influencing lender behavior,â Sias said. âBorrowers whose handwriting is more readable, more positive, and contains less evidence of deception benefit from lower interest rates. And the reverse is true when their handwriting is less readable, more negative, and includes more money. misleading clues – these borrowers are charged higher rates by lenders. “
The research, forthcoming in the Journal of Financial and Quantitative Analysis, also examined whether the answer is rational. In other words, can lenders really extract valuable information from a borrower’s writing style?
Researchers have found that borrowers’ writing styles contain information that can be used to help predict the likelihood of a borrower not paying off debt. Borrowers are less likely to default when their handwriting is more readable, more positive, and when it’s more likely to be truthful, research finds.
Sias’ latest round of tests examined whether the evidence suggests that crowdfunding lenders make full use of the information obtained through a borrower’s writing style.
âWhile borrower’s handwriting appears to influence lender decisions, lenders do not fully incorporate the informational content that can be obtained from the readability, tone, and clues of borrower deception,â Sias said. âAlthough a borrower with less legible handwriting pays a higher interest rate on average than an otherwise similar borrower, the rate is not high enough to fully compensate for the increased probability of default associated with lower readability. “
In other words, the evidence suggests that readability, tone, and truthfulness are important in borrowers’ writing, and lenders should pay more attention to this.
âPlatforms, or third parties, can potentially find opportunities to improve market efficiency by better exploiting linguistic characteristics,â said Silas. âExisting and future fintech (financial technology) platforms should recognize that there may be an information efficiency cost associated with eliminating borrower writing, even though there are other efficiencies elsewhere. “
The research was co-authored by Qian Gao of the Zicklin School of Business at the City University of New York and Mingfeng Lin of the Scheller College of Business at the Georgia Institute of Technology.