Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit
53 Pages Posted: 12 Jul 2015 Last revised: 6 Dec 2017
Date Written: October 2017
We exploit a natural experiment in the largest online consumer lending platform to provide the first evidence that loan terms, in particular maturity choice, can be used to screen borrowers based on their private information. We compare two groups of observationally equivalent borrowers who took identical unsecured 36-month loans, only one of which had also a higher rate 60-month maturity choice available. When a long maturity option is available, fewer borrowers take the short-term loan, and those who do default less. Additional findings suggest borrowers self-select on private information about their future ability to repay.
Keywords: Adverse Selection, Loan Maturity, Consumer Credit
JEL Classification: D82, D14
Suggested Citation: Suggested Citation