What is the role of personality in consumer loan applications?

Olga Goldfayn & Nathanael Vellekoop
Posted on March 13, 2018

"Give me a lever long enough and a fulcrum on which to place it, and I shall move the world."


Most consumers will apply for a loan at least once in their life. This could be a mortgage, a car loan, a credit card, or even a higher overdraft limit on the current account. The decision to apply for a loan, repaying the debt, as well as feelings about the loan afterwards may depend on the personality of the consumer.  

Used in psychology, management and marketing for decades, the concept of personality has found its way into applied economics relatively recently, and has become a field of rapidly growing research, in part thanks to the strong and vocal support of Jim Heckman, a Nobel Prize in Economics laureate.

Personality traits

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, 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 more1 and are more likely to hold stocks and mutual funds2. 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 vs. 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 extraversion, agreeableness, conscientiousness, openness to experience, and neuroticism. Big Five personality traits have been shown to influence a wide range of economic activities. So, extraversion is associated with higher spending, particularly with impulsive and conspicuous consumption3, higher neuroticism has been shown to impact borrowing in a negative way 4, while more conscientious people make better financial decisions across the board, even later in life when their cognitive capacities decline5.

Big Five personality traits

  • Openness to experience:   Vivid imagination, curiosity 
  • Conscientiousness:            Organized, efficient and dependent
  • Extraverted:                        Energetic and out-going
  • Agreeableness:                   Friendly, compassionate and cooperative
  • Neuroticism:                        Nervous, worried, and sensitive

In this research project, we focus on personality traits and the loan application process. The data comes from a representative Dutch household survey. Between 1993-2017 people were repeatedly asked a range of questions concerning borrowing behavior, which includes whether households considered and applied for different types of loans or borrowed money from family and friends, whether the applications were turned down and – importantly – if people regretted taking a loan. We find that personality traits matter in all these aspects of the loan process, even when taking different income, wealth, education, as well as preference for risk and financial literacy into account. 

Loan applications: Who?

Who decides to apply for a loan? Given that a lot of people feel that they are likely to be turned down – whether it is in fact so, or not – and thus choose not to apply at all, it is an important question in itself. We find that more agreeable people – who are more flexible and cooperative – are more likely to apply for a loan. Neurotic people, however, are less likely to request loans, due to the fear of being turned down. This anxiety seems to be justified, at least partially, as we find that that neurotic people do have a higher probability of having a loan application denied. It is important to note that this is irrespective of their financial situation and thus it appears that people high on neuroticism tend to make mistakes in the loan application process and thus be denied more often. On the contrary, people with an internal locus of control are more likely to receive a loan and less likely to be discouraged from applying for one.

Regretting the loan?

Do people regret taking loans? The answer to this question is important given the potential consequences for future borrowing choices and the relation with the lending organization in general. People who score highly on neuroticism express considerably more doubt over their loan decisions, which is not surprising as neuroticism is associated with anxiety and doubt over one’s actions. But – perhaps surprisingly – more agreeable and open-to-experience people are also more likely to regret taking a loan. Perhaps these types of people are more easily persuaded into taking a loan, which they may regret afterwards. In contrast, conscientious people – who are thorough in everything they do and thus have probably considered their options and conditions before applying for a loan – are less likely to regret taking a loan.  Additionally, people with an internal locus of control express less regret. Indeed, this can be well explained by their preference for action-oriented behavior and with the feeling of responsibility for their own choices.

In cases where they have an issue with their loan, more extraverted as well as more agreeable people are more likely to seek contact with a bank or debt assistance. Importantly, this implies that introvert and less flexible people may find it particularly difficult to contact a bank in case of problematic loans. This is significant, as seeking resolution can allow both the borrower and the bank to find an acceptable solution and develop a lasting and satisfying relationship.    

Loan beliefs

We also look at the beliefs people have about the possibility of borrowing from a bank or from their close social circle. People with internal locus of control are significantly more confident in their chances of being able to borrow, both from a bank and from their social network. More extravert and open-to-experience people may rely more on their family and friends, while more conscientious people are more likely to feel they have a good chance of receiving a formal loan.

Banks and other financial institutions could assess clients' personality profile and offer customized credit solutions.

Our research has shown that personality traits play an important role in people’s borrowing behavior and beliefs. Banks and other financial institutions have experience of collecting data about credit histories of people and households, as well as risk attitudes and applying this information to customize their offers; a natural extension is to assess the personality profile of the consumers, potential and active borrowers. Using this information it would be possible to better understand the needs of the bank clients and develop a customized approach to improve and enhance collaboration between the customer and the bank.

It may be a good idea, for example, to offer more detailed information about products, terms and conditions to conscientious people – they will appreciate and use it. It may also be beneficial to allow agreeable as well as open-minded people more time and room for consideration, perhaps even offering an assessment of the potential costs/benefit of the loan to avoid disappointment afterwards. Neurotic people may need more reassurance and reminders about the positive side of their loan. And in case of issues with the debt, a nudge and perhaps an offer of assistance can serve well if the customer is an introvert.  

While people with an internal locus of control seem to behave like ideal borrowers – they more readily and successfully apply for loans and do not seem to regret the decision or have high failure rates – they may, however, profit from offers more tailored to their needs. It may also be possible to increase participation rates among people with an external locus of control. Another Nobel Prize in Economics laureate, Richard Thaler, has shown that even small nudges can dramatically change people’s behavior when applied with a right leverage. The understanding of how personality traits affect the financial choices of households provides such a leverage.

Olga Goldfayn is a PhD student at Goethe University Frankfurt with Michael Haliassos. Nathanael Vellekoop is an Assistant Professor at Goethe University Frankfurt and a researcher with SAFE. We gratefully acknowledge financial support from the Think Forward Initiative.  


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