The Pricing Strategies of Unsecured Consumer Loans

Abstract

This paper analyzes lenders' pricing strategies in the business-to-customer (B2C) unsecured loan market by using a proprietary dataset of approximately 3 million unsecured consumer loans from a B2C online retailer in China. We find that lenders' decisions to invite customers are based on customers' credit rating and age and that lenders increase credit limits and charge higher interest rates for solicited riskier borrowers than for unsolicited riskier borrowers. This phenomenon was exacerbated after the passage of the China Banking Regulatory Commission (CBRC) Act. We develop a model of revolving credit contract design. The model's predictions are consistent with our empirical findings.

Keywords: Consumer finance, Business-to-consumer (B2C), Pricing strategies

JEL Classification: D12, D14, D18, D31, D91, E21, G11, G21, G23, G28