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How to predict if the money we are going to borrow will come back? It turns out that there is a more reliable way than checking the credit history and assessing the income of the borrower. You just need to carefully consider the words with which he expresses his request.
Borrowing and lending money to all of us happens quite often. Faced with the fact that this money cannot be returned on time later, it is also, alas, necessary. And it is hardly possible to completely exclude such a possibility. But can the lender reduce their risks? This question was asked by American marketing and business analysts Oded Netzer (Oded Netzer), Alain Lemaire (Alain Lemaire) and Michael Herzenstein (Michal Herzenstein). Their large-scale study has not yet been completed, but the scientists shared their first findings at a conference in Boulder held by the University of Colorado (USA)1 and devoted to the problems of making financial decisions.
The researchers approached the problem from an unexpected angle, deciding to study the words in which borrowers formulate their requests. The source of information was prosper.com, the first online direct lending project in the United States. Any borrower can apply for Prosper. And any creditor is free to choose to whom and under what conditions to lend an amount from 2 to 35 thousand dollars. Prosper is very popular, with more than 2 million registered users and total loans in excess of $2 billion. Therefore, scientists have no shortage of material for research.
Pass the tests
- What does money mean to you?
So far, Netzer and his colleagues have managed to analyze about 18 thousand applications for 2007-2008, and here are their first conclusions. The mention of God in a request for money should alert. Those who swore to repay their debt on time were, on average, 2,2 times more likely than other borrowers to overdue and default on loans. However, the phrase “before salary” (or before the date of any other payments) should serve as an even more alarming signal. Its use in a request for the provision of money increases the risks of the lender immediately by 2,7 times.
It is also more risky to trust those whose requests are excessively polite and who use the future tense too often. According to Oded Netzer, both may indicate that a person makes promises that he does not intend to keep. Finally, with caution one should lend money to those who explain their request by misfortunes that have fallen. In this case, the borrower does not necessarily tell a lie. It is possible that the misfortune really happened, but this fact itself reduces the likelihood that the money will be returned on time.
If we talk about positive signals, then the main ones are words that demonstrate financial literacy and a fairly high general level of education of a potential borrower. Among the goals for which loans are returned most accurately and stably are marriage and university education.
The researchers claim that their method allows predicting cases of delinquency and loan defaults by 4-6% more efficiently than the risk assessment system adopted today by banks (checking a credit history, borrower’s income, and so on). And its implementation would reduce Prosper’s bad debt by at least $1,4 million. Netzer and his colleagues provided lists of words and expressions that appear in requests for money and allow lenders to predict the behavior of the borrower. Here are the negative signals: “God”, “before payday”, “mistake”, “hospital”, “difficulties”, “bad”, “loss”, “give me a chance”, “please help”, “I promise”, “let me”, “mother”. And here are the words and expressions that reliable borrowers often use: “worthwhile”, “income”, “excellent credit history”, “low interest rate”, “after tax”, “minimum”, “higher education”, “wedding”, “study loan”, “university”.
Of course, you need to understand that the English language and the corresponding picture of the world differ from the Russian language and the realities of culture. And it is quite possible that a domestic study of this kind would have given completely different results. And yet, the next time you hear the request, “For God’s sake, lend until payday,” it might be wise to take it with some skepticism.
Read more:
- Why do we hesitate to spend money (and time) on ourselves?
- Own and other people’s money
1 For more information, see economic news portal Quarz.