Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit

53 Pages Posted: 12 Jul 2015 Last revised: 6 Dec 2017

See all articles by Andrew Hertzberg

Andrew Hertzberg

Federal Reserve Bank of Philadelphia

Andres Liberman

New York University (NYU) - Department of Finance

Daniel Paravisini

London School of Economics & Political Science (LSE)

Multiple version iconThere are 2 versions of this paper

Date Written: October 2017

Abstract

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

Hertzberg, Andrew and Liberman, Andres and Paravisini, Daniel, Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit (October 2017). Columbia Business School Research Paper No. 15-68, Available at SSRN: https://ssrn.com/abstract=2629383 or http://dx.doi.org/10.2139/ssrn.2629383

Andrew Hertzberg

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Andres Liberman (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~aliberma/

Daniel Paravisini

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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