Date of Award

6-2015

Document Type

Open Access

Degree Name

Bachelor of Arts

Department

Economics

First Advisor

Eshragh Motahar

Second Advisor

Roger Hoerl

Language

English

Keywords

risk, default, industry, lending, club

Abstract

With the rise of the Internet, a new form of financing, peer-to-peer lending (P2PL), has embraced its opportunities in the 21st Century. After Zopa, the world's first financial company that offers P2P loans, was founded in the UK, the U.S. also seized the trend and witnessed the launch of Prosper in 2006, followed by Lending Club. The IPO of Lending Club in 2014 created a faster momentum for the development of similar companies in the industry and cleared some concerns regarding SEC regulations. However, given the business model that P2PL companies adopt and the economic characteristics of P2P loans borrowers, the industry is still facing controversies over default risk controls. Therefore, it is important to understand the industry and its risk control measures. This paper presents an overview of the historical background of the P2PL industry and discusses its advantages and disadvantages that lead to the important role of risk control. By adopting the linear probability model and the logistic regression model, this paper proposes a method of measuring the default risk of P2P loans using the 2007-2011 Lending Club loan dataset. It finds that 8 variables in particular, employment length, inquiries by creditors in the last 6 months, installment, interest rate, annual income, public record, revolving line utilization, and term. While only annual income and public record have a negative relation with default risk, all the remaining 6 variables will contribute to a higher default risk.

Download

Included in

Finance Commons

Share

COinS