Personality Traits and Household's Borrowing Behavior

A TFI Research Challenge project by Olga Goldfayn and Nathanael Vellekoop
Posted on April 02, 2018

The research project "The Role of Personality Traits in Household Loan Expectations and Borrowing Constraints" is one of the eight projects selected last year for the TFI Research Challenge.

In this report, Dr Nathanael Vellekoop and Olga Goldfayn explore how personality traits are related to households' borrowing behavior. Using Dutch survey data from 2005 to 2017, they find that different personality characteristics matter for people's expectations of getting a loan, whether a loan application is denied or not, and whether a person experiences loan regrets or loan troubles.


How do personality traits matter when applying for a loan? With household loan applications, it’s typically the “hard” factors − household income, assets, other loans, and credit scores − that are considered to be important. This is information a loan officer can request and process. But why do some people who need a loan and possess all the right “hard” factors in order to qualify, choose not to apply? While financial knowledge, financial literacy and financial capabilities may be important factors (see for example previous TFI research by Shephard and co-authors, 2017), we examine if there is a role for personality traits too.  

Personality traits and Household Finance

Personality traits have been used in psychology for a long time, but have only recently been introduced in economics and finance (see for an overview Almlund and co-authors, 2011). Several personality traits have been shown to have an effect on financial decisions.  One is ‘locus of control’: people with an internal locus of control believe their actions, abilities and efforts determine their outcomes in life, whereas people with an external locus of control feel other forces, like luck, shape their life. People with an internal locus of control generally tend to save more (Cobb-Clark and co-authors, 2016) and are more likely to hold stocks and mutual funds (Salamanca and co-authors, 2016). The key idea is that if a person believes they have more control over the expected outcome, they are more likely to devise a strategy and actively pursue it. 

Whereas locus of control offers insight into a consumer’s choice for action versus inaction, the Big Five personality traits give an idea of the patterns in which people feel, think and behave, which can in turn affect a consumer’s preferences and subsequent decisions. The Big Five personality traits include openness to experience, conscientiousness, extraversion, agreeableness, neuroticism (the opposite of emotional stability). Big Five personality traits have been shown to influence a wide range of economic activities, e.g. extraversion is associated with higher spending, particularly with impulsive and conspicuous consumption (Landis and Gladstone, 2017), higher neuroticism has been shown to impact borrowing in a negative way (Nyhus and Webley, 2001), while more conscientious people make better financial decisions across the board, even later in life when their cognitive capacities decline (Goldfayn, 2016).  

Personality Traits and Loan Applications: Conceptual framework

We hypothesize that personality traits can help and hinder household loan applications in three ways. First, certain personality traits may hinder the loan application process directly. An example of this is that individuals with less internal locus of control tend to believe that their application will be denied, and may shy away from applying for a loan. Second, we hypothesize that personality traits may affect the quality of the loan, e.g. more conscientious people are more likely to do their homework, and are able to get a better loan. Third, there are elements surrounding the loan process that have a relationship aspect. This could be bargaining with a loan officer, renegotiating after repayment problems arise, or even preferences for the ways of communication with a bank, e.g. using internet banking in order to avoid personal contact.

Personality Traits and Loan Applications: Implementation

Our analysis is exploratory. We relate industry-standard measures of personality traits to the expectations of getting a loan, whether a loan application is denied, and whether a person changed their mind on a loan application, because they feared that their application might be rejected. The last group of discouraged borrowers is hard to reach for a financial institution, since they typically do not show up at a loan desk. For that reason we use a household survey that is representative of the Dutch population. For the years 2005-2017 a large sample of Dutch households were asked questions every year about assets, income, and loan applications, as well as personality traits. In all results we control for the effects of work status, income, gender and age. We divide the process of loan application into three steps: before, during and after. The first step is expectations about the outcome, the second is the actual application, and the third is what happens after the application has been granted i.e. whether the individual regrets taking out the loan or experienced any problems paying it back. We find that personality traits matter in each step, especially locus of control.


Finding 1: Personality Traits and Loan Expectations

In each year the survey asks two questions about loan expectations. One is whether a person believes she is in a position to borrow a substantial amount of money from friends or family. We call this informal borrowing. The second question is more related to formal borrowing, and asks whether a person believes that her loan application will be approved if she applies for a loan right now. We find that individuals with an internal locus of control are more likely to report that they expect to be able to borrow money from family and friends, as well as from formal lending institutions. Interestingly we find that higher openness, extraversion and agreeableness increase the expectations to borrow informally (from family or friends), but not from formal lending institutions. On the other hand, higher conscientiousness and lower neuroticism are positively associated with the expectation  of being able to borrow from formal lending institutions. The effects of personality traits are large, and economically meaningful, e.g. an increase in locus of control by one unit increases the probability that the person believes they will be able to borrow informally by 4.2 percentage points, and by 3.4 percentage points in the case of formal loan expectations.

Finding 2: Personality Traits and Credit Constraints

The second step is whether a loan application is granted or not. A person is considered to be credit constrained if she is unable to acquire credit or – importantly – believes herself unable to acquire it. Importantly, we have two measures of being credit constrained: first,  whether a loan application has been denied in the past two years, and second,  whether a person thought of applying for a loan, but changed their mind, because they were afraid their application might be turned down. The second phenomenon we call “discouraged borrowing”, in line with previous research (Jappelli, 1990). On both measures we find that external locus of control and neuroticism are important. A more external locus of control and higher neuroticism are associated with being credit-constrained. Again, the effects are large and economically meaningful. An increase of one unit in external locus of control is associated with a 0.8 percentage point increase in the probability that a request for credit is turned down. This is a large effect, given that the baseline probability of being turned down is 3.6 percent (so the relative effect is 0.8/3.6 = 22 percent). For changing one’s mind on a loan application, external locus of control is associated with a 0.3 percentage point increase, where this probability in the population is 1.2 percent (a relative effect of 25%).

Finding 3: Personality Traits and Loan Regret

The last step we consider is the evaluation of a loan afterwards. Twenty-one percent of our sample say they regret taking a loan, with more open and more agreeable people expressing more regret. In contrast, more conscientious and more emotionally stable individuals express less regret. Unfortunately we do not have the information in the data to pin down which loans individuals regret, or the exact reasons why they regret taking it out. However, our finding that personality traits are important for the evaluation of a loan afterwards is an interesting avenue for further research. One can expect that loan regret is important for customers coming to the same bank for new loans, or other financial products, but this is speculation at this point.  


Personality traits can help or hinder the seeking of solutions for over-indebtedness.

To our knowledge, we are the first ones to document the relationship between borrowing expectations and borrowing constraints on the one hand, and personality traits on the other. In the same way that personality traits can help or hinder education decisions, personality traits can complement or substitute financial literacy and financial capabilities. A straightforward application would be to investigate the relationship between personality traits and financial advice (Hackethal et al., 2012). One may expect that people with different personality traits would respond differently towards the communication style, and the communication channel, used by the financial advisor. This may also apply to the domain of loan problems, where personality traits can help or hinder the seeking of solutions for over-indebtedness. A third application is in the realm of assessing creditworthiness. Some existing research tries to document whether psychometric scores – of which personality traits can be a part – can be a substitute for formal credit scores (e.g. Porche, 2017; Zoldi and co-authors, 2017). We argue that personality traits can very well be the type of soft information that can complement the “hard” information contained in credit scores.

Olga Goldfayn is a PhD student in Economics at Goethe University Frankfurt, Germany. E-mail:  
Nathanael Vellekoop is an Assistant Professor at Goethe University Frankfurt and a researcher with SAFE. E-mail: