Prepayment and Default of Consumer Loans in Online Lending

22 Pages Posted: 8 Mar 2016

See all articles by Zhiyong Li

Zhiyong Li

School of Finance, Southwestern University of Economics and Finance; University of Edinburgh Business School

Xiao Yao

Royal Bank of Scotland (RBS)

Qing Wen

Southwestern University of Finance and Economics (SWUFE) - School of Finance

Wei Yang

Southwestern University of Finance and Economics (SWUFE)

Date Written: March 1, 2016

Abstract

Online lending provides a means of fast financing for borrowers based on their creditworthiness. However, borrowers may undermine this agreement due to early repayment or default, which are two major concerns for the platform and lenders, since both affect the profitability of a loan. While default risk is frequently focused on in credit scoring literature, prepayment has received much less attention, despite a higher prepayment rate being observed in online lending when compared with default. This paper uses multivariate logistic regression to predict the probability of both the underlying prepayment and default risk. Real consumer lending data of 160,956 unsecured loans provides evidence that these two events have their own distinct patterns. The model, incorporating macroeconomic factors, also addresses the influence of economic conditions which cannot be ignored since the last financial crisis. The out-of-sample prediction results have shown that both prepayment and default can be accurately predicted.

Keywords: prepayment; default; prediction; online lending; credit

JEL Classification: H81; C53; D81

Suggested Citation

Li, Zhiyong and Yao, Xiao and Wen, Qing and Yang, Wei, Prepayment and Default of Consumer Loans in Online Lending (March 1, 2016). Available at SSRN: https://ssrn.com/abstract=2740858 or http://dx.doi.org/10.2139/ssrn.2740858

Zhiyong Li (Contact Author)

School of Finance, Southwestern University of Economics and Finance ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China
+8618508226040 (Phone)

University of Edinburgh Business School ( email )

Old College
South Bridge
Edinburgh, Scotland EH8 9JY
United Kingdom

Xiao Yao

Royal Bank of Scotland (RBS)

135 Bishopsgate
London, EC2M 3UR
United Kingdom

Qing Wen

Southwestern University of Finance and Economics (SWUFE) - School of Finance

Chengdu, 610074
China

Wei Yang

Southwestern University of Finance and Economics (SWUFE)

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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