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Important Factors Determining Fintech Loan Default: Evidence from the LendingClub Consumer Platform

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Abstract

This study examines key default determinants of fintech loans, using loan-level data from the LendingClub consumer platform during 2007–2018. We identify a robust set of contractual loan characteristics, borrower characteristics, and macroeconomic variables that are important in determining default. We find an important role of alternative data in determining loan default, even after controlling for the obvious risk characteristics and the local economic factors. The results are robust to different empirical approaches. We also find that homeownership and occupation are important factors in determining default. Lenders, however, are required to demonstrate that these factors do not result in any unfair credit decisions. In addition, we find that personal loans used for medical financing or small business financing are more risky than other personal loans, holding the same characteristics of the borrowers. Government support through various public-private programs could potentially make funding more accessible to those in need of medical services and small businesses without imposing excessive risk to small peer-to-peer (P2P) investors.

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  • Christophe Croux & Julapa Jagtiani & Tarunsai Korivi & Milos Vulanovic, 2020. "Important Factors Determining Fintech Loan Default: Evidence from the LendingClub Consumer Platform," Working Papers 20-15, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:87815
    DOI: 10.21799/frbp.wp.2020.15
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    Cited by:

    1. Chen, Pei-Fen & Lo, Shihmin & Tang, Hai-Yuan, 2022. "What if borrowers stop paying their loans? Investors’ rates of return on a peer-to-peer lending platform," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 359-377.
    2. Jérémie Bertrand & Laurent Weill, 2022. "In December days are shorter but loans are cheaper," Economic Inquiry, Western Economic Association International, vol. 60(3), pages 1335-1356, July.
    3. Hughes, Joseph P. & Moon, Choon-Geol, 2022. "How bad is a bad loan? Distinguishing inherent credit risk from inefficient lending (Does the capital market price this difference?)," Journal of Economics and Business, Elsevier, vol. 120(C).
    4. Franklin Allen & Xian Gu & Julapa Jagtiani, 2022. "Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in China”," Working Papers 22-12, Federal Reserve Bank of Philadelphia.
    5. Franklin Allen & Xian Gu & Julapa Jagtiani, 2021. "A Survey of Fintech Research and Policy Discussion," Review of Corporate Finance, now publishers, vol. 1(3-4), pages 259-339, July.
    6. Joseph P. Hughes & Julapa Jagtiani & Choon-Geol Moon, 2022. "Consumer lending efficiency: commercial banks versus a fintech lender," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-39, December.
    7. Allen, Franklin & Gu, Xian & Jagtiani, Julapa, 2022. "Fintech, Cryptocurrencies, and CBDC: Financial Structural Transformation in China," Journal of International Money and Finance, Elsevier, vol. 124(C).
    8. Loutfi, Ahmad Amine, 2022. "A framework for evaluating the business deployability of digital footprint based models for consumer credit," Journal of Business Research, Elsevier, vol. 152(C), pages 473-486.
    9. Erik Dolson & Julapa Jagtiani, 2021. "Which Lenders Are More Likely to Reach Out to Underserved Consumers: Banks versus Fintechs versus Other Nonbanks?," Working Papers 21-17, Federal Reserve Bank of Philadelphia.

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    More about this item

    Keywords

    big data; crowdfunding; financial innovations; household finances; lasso selection methods; machine learning; peer-to-peer lending; P2P/marketplace lending;
    All these keywords.

    JEL classification:

    • D10 - Microeconomics - - Household Behavior - - - General
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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