Peer to Peer Lending: Auctioning Microcredits over the Internet

Abstract

Peer-to-peer (P2P) lending platforms are online platforms where borrowers place requests for loans online and private lenders bid to fund these. Such platforms became available in 2005 and have increasingly been used ever since. However, little is still known about the factors determining the success of a loan listing or the interest rates on these platforms. This paper presents the results from an empirical analysis of 54077 listings on the platform Prosper. Results indicate that verified bank account information and the credit rating are key determinants for a listing's success. Additional personal information (e.g. photos of the borrower) also has a significant influence on funding. Less important, though still relevant, are peer groups within the online community. Interest rates on P2P-lending platforms are primarily determined by credit rating and debt-to-income ratios. In this respect, P2P lending does not differ much from the traditional banking system. However, it promises lower costs of borrowing by cutting out an expensive intermediary - the banks. As empirical data show, it will mainly be the reliable, AA- or A-rated borrowers who can exploit this opportunity. High-risk borrowers, however, have serious difficulties in successfully acquiring loans online, as only about 5.5% of their listings are funded.

Keywords: Peer-to-peer lending, consumers, reverse auctions, personal loans, interest rates, micro-credits, critical success factors, credit ratings, online banking platforms

JEL Classification: G20