Beauty and the Borrower

by Colin Gustafson
Fri, 14 Mar 2008 at 11:04 AM

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Beautiful people are more likely to get loans and to pay less interest than average-looking borrowers with near-identical credit credentials, a New York University associate professor of finance, Enrichetta Ravina, finds in a paper cited this week on the Stumbling and Mumbling blog.

Examining the photos and financial profiles of more than 7,000 online loan applicants, Ms. Ravina found good-looking applicants were more likely to get a loan by 1.41 percentage points, and paid 81 basis points less than their mediocre-looking counterparts with the same credit ratings.

Yet, despite standing a better chance of landing a loan and paying less, good-looking borrowers pose a significantly higher credit risk, she writes. Better-looking borrowers are, on average, three times as likely to default on their loans than average-looking applicants. Beauty, especially, "is associated with substantially higher delinquency rates," the professor writes.

Lenders' personal "preferences and perceptions" about borrowers has just as much of an impact on the loan supply as "statistical discrimination" of financial information, Ms. Ravina writes.

"This is evidence that discrimination in favor of the good-looking, which is common in labour markets, might be" a matter of taste, the Stumbling and Mumbling blogger, Chris Dillow, writes.

In her report, Ms. Ravina also notes one troubling consequence of lenders' basing their decisions on personal perception: Black borrowers pay between 139 and 146 basis points more than white borrowers with similar financial profiles.

A SAFER, PURPLER $5 BILL The Federal Reserve this week is doing its part to strengthen the American dollar — not against inflation, but against counterfeiting. Yesterday, Fed officials unveiled a redesigned $5 bill meant to deter counterfeiters with a slew of new security features.

The most noticeable safeguard: its purple color.

To be distributed to customer banks this week, the new $5 bill retains President Lincoln's portrait on the front. But its color scheme has changed to include a light shade of purple in the center that fades to gray near the edges of the note.

"I am sure Abraham Lincoln will not be upset" about the change, the blogger behind World Financial Blog, Michael Szumielewski, writes. The "update adds complexity to the bill to make counterfeiting more difficult."

To make the note more difficult to counterfeit, the Bureau of Engraving and Printing has added a number of other, less-noticeable features, including two new watermarks on both sides and an embedded security thread, which was moved to the right side of Lincoln's portrait and glows blue under ultraviolet light.

The safer bills will eventually replace the older greenbacks currently in circulation, which have an average 16-month lifespan, Mr. Szumielewski writes.

Still, don't expect the new notes to protect against other looming dangers in the economy, a blogger at Nerve.com, Bryan Christian, warns.

Even as they foil counterfeiters, the bills will "be worth less every day," he writes. "Have a great recession, everybody!"

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