Evaluating-credit-risk-and-loan-performance-in-onl

Thisarticlewasdownloadedby:[OndokuzMayisUniversitesine]On:10November2014,At:22:02Publisher:RoutledgeInformaLtdRegisteredinEnglandandWalesRegisteredNumber:1072954Registeredoffice:MortimerHouse,37-41MortimerStreet,LondonW1T3JH,UKClickforupdatesAppliedEconomicsPublicationdetails,includinginstructionsforauthorsandsubscriptioninformation:(P2P)lendingRizaEmektera,YanbinTub,BenjamasJirasakuldechc&MinLudaDepartmentofFinance,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAbDepartmentofMarketing,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAcDepartmentofFinance,SchoolofBusiness,SlipperyRockUniversityofPennsylvania,SlipperyRock,PA16057,USAdDepartmentofEconomics,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAPublishedonline:13Oct2014.Tocitethisarticle:RizaEmekter,YanbinTu,BenjamasJirasakuldech&MinLu(2015)EvaluatingcreditriskandloanperformanceinonlinePeer-to-Peer(P2P)lending,AppliedEconomics,47:1,54-70,DOI:10.1080/00036846.2014.962222Tolinktothisarticle:(the“Content”)containedinthepublicationsonourplatform.However,Taylor&Francis,ouragents,andourlicensorsmakenorepresentationsorwarrantieswhatsoeverastotheaccuracy,completeness,orsuitabilityforanypurposeoftheContent.Anyopinionsandviewsexpressedinthispublicationaretheopinionsandviewsoftheauthors,andarenottheviewsoforendorsedbyTaylor&Francis.TheaccuracyoftheContentshouldnotberelieduponandshouldbeindependentlyverifiedwithprimarysourcesofinformation.TaylorandFrancisshallnotbeliableforanylosses,actions,claims,proceedings,demands,costs,expenses,damages,andotherliabilitieswhatsoeverorhowsoevercausedarisingdirectlyorindirectlyinconnectionwith,inrelationtoorarisingoutoftheuseoftheContent.Thisarticlemaybeusedforresearch,teaching,andprivatestudypurposes.Anysubstantialorsystematicreproduction,redistribution,reselling,loan,sub-licensing,systematicsupply,ordistributioninanyformtoanyoneisexpresslyforbidden.Terms&Conditionsofaccessandusecanbefoundat(P2P)lendingRizaEmektera,YanbinTub,BenjamasJirasakuldechc,*andMinLudaDepartmentofFinance,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAbDepartmentofMarketing,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAcDepartmentofFinance,SchoolofBusiness,SlipperyRockUniversityofPennsylvania,SlipperyRock,PA16057,USAdDepartmentofEconomics,SchoolofBusiness,RobertMorrisUniversity,MoonTownship,PA15108,USAOnlinePeer-to-Peer(P2P)lendinghasemergedrecently.Thismicroloanmarketcouldoffercertainbenefitstobothborrowersandlenders.UsingdatafromtheLendingClub,whichisoneofthepopularonlineP2Plendinghouses,thisarticleexplorestheP2Ploancharacteristics,evaluatestheircreditriskandmeasuresloanperformances.Wefindthatcreditgrade,debt-to-incomeratio,FICOscoreandrevolvinglineutilizationplayanimportantroleinloandefaults.Loanswithlowercreditgradeandlongerdurationareassociatedwithhighmortalityrate.TheresultisconsistentwiththeCoxProportionalHazardtestwhichsuggeststhatthehazardrateorthelikelihoodoftheloandefaultincreaseswiththecreditriskoftheborrowers.Finally,wefindthathigherinterestrateschargedonthehigh-riskborrowersarenotenoughtocompensateforhigherprobabilityoftheloandefault.TheLendingClubmustfindwaystoattracthighFICOscoreandhigh-incomeborrowersinordertosustaintheirbusinesses.Keywords:Peer-to-Peerlending;creditgrade;FICOscore;defaultriskJELClassification:D12;E41;E44;G20I.IntroductionWiththeadventofWeb2.0,ithasbecomeeasytocreateonlinemarketsandvirtualcommunitieswithconvenientaccessibilityandstrongcollaboration.OneoftheemergingWeb2.0applicationsistheonlinePeer-to-Peer(P2P)lendingmarketplaces,wherebothlendersandborrowerscanvirtuallymeetforloantransactions.Suchmarketplacespro-videaplatformserviceofintroducingborrowersto*Correspondingauthor.E-mail:[e-mail],2015Vol.47,No.1,54–70,©2014Taylor&FrancisDownloadedby[OndokuzMayisUniversitesine]at22:0210November2014lenders,whichcanoffersomeadvantagesforbothborrowersandlenders.Borrowerscangetmicroloansdirectlyfromlenders,andmightpaylowerratesthancommercialcreditalternatives.Ontheotherhand,lenderscanearnhigherratesofreturncomparedtoanyothertypeoflendingsuchascor-poratebonds,bankdepositsorcertificateofdeposits.OneoftheproblemsinonlineP2Plendingisinformationasymmetrybetweentheborrowerandthelender.Thatis,thelenderdoesnotknowtheborrower’scredibilityaswellastheborrowerdoes.Suchinformationasymmetrymightresultinadverseselection(Akerlof,1970)andmoralhazard(StiglitzandWeiss,1981).Theoretically,someofthesepro-blemscanbealleviatedbyregularmonitoring,butthisapproachposesachallengeintheonlineenvir-onmentbecausetheborrowersandthebuyersdonotphysicallymeet.1Fosteringandenha