Online Peer-to-Peer Lending: Determinants of Loan Performance

Abstract

This paper analyses the factors that determine loan performance in online peer-to-peer lending. The basis of online peer-to-peer lending is to provide loans to individuals or businesses through online lending platforms that match lenders or investors with the borrowers. Unlike in traditional financial institutions, individual investors are the ones who assume the loan risk in peer-to-peer lending. These individual lenders suffer from a serious problem of information asymmetry. As a result, peer-to-peer lending platforms provide the lenders with various loan quality information along with assigned credit grades with a view to reducing the information asymmetry. By analysing 306,439 matured loans funded on the online peer-to-peer lending platform ‘Lending Club’, this study suggests that the platform-assigned credit grade is the most significant determinant of loan performance. In addition, loan amount, debt-to-income ratio, annual income, open credit lines, total credit lines and inquiries in the last 6 months were also found to be major determinants of loan performance.