Advantageous Selection in Fintech Loans
59 Pages Posted: 18 Feb 2021 Last revised: 18 Nov 2021
Date Written: November 17, 2021
Using data from the largest online lender in the United States, I document advantageous selection in loan amount. By exploiting a natural experiment within the platform, I show that borrowers who select larger loans are less likely to default. This selection is driven by households who live in states with bankruptcyfriendly laws, where borrowers’ default costs are lower. Standard models where borrowers maximize their utility cannot rationalize my results and make the opposite prediction. In a simple model of household borrowing, I show that my results can
be explained by the fact that borrowers facing higher loan prices search more intensively for cheaper loans. This effect is stronger for the safest borrowers, as they enjoy the greatest benefits from switching.
Keywords: Online Lending, Household Finance
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