Tell Me a Good Story and I May Lend you Money: The Role of Narratives in Peer-to-Peer Lending Decisions

TLDR

The study investigates whether the number and content of borrowers’ identity claims in narrative descriptions influence lender decisions on unsecured personal loans and predict long‑term loan performance. Unverifiable identity claims raise loan funding but lower repayment rates, with more claims increasing funding yet reducing performance, and while trust‑worthy or successful identities attract funding, they are poor predictors of repayment compared to moral or economic hardship identities.

Abstract

This research examines how identity claims constructed in narratives by borrowers influence lender decisions about unsecured personal loans. Specifically, do the number of identity claims and their content influence lending decisions, and can they predict the longer-term performance of funded loans? Using data from the peer-to-peer lending website Prosper.com , the authors find that unverifiable information affects lending decisions above and beyond the influence of objective, verifiable information. As the number of identity claims in narratives increases, so does loan funding, whereas loan performance suffers, because these borrowers are less likely to pay back the loan. In addition, identity content plays an important role. Identities focused on being trustworthy or successful are associated with increased loan funding but unfortunately are less predictive of loan performance than other identities (i.e., moral and economic hardship). Thus, some identity claims aim to mislead lenders, whereas others provide true representations of borrowers.