The Taste of Peer-to-Peer Loans

Roure et al. (2016) find that P2P lending is substituting the banking sector for high-risk consumer loans since banks are unwilling or unable to supply this slice of the market. P2P lending platforms advertise that they provide access to credit to those that are underbanked, and that they lower the cost of borrowing through refinancing, and even enhance one’s credit scores. Is it true? Whether borrowers can obtain benefits for future financing? How do P2P loans affect credit score of borrowers compared with non-P2P borrowers?

Yuliya S. DemyanykElena Loutskina and Daniel Kolliner eevaluateP2P lending patterns and their implications on consumer balance sheets and financial stability using a large representative sample of P2P and non-P2P borrowers reported by a credit bureau. The paper aims to answer the below questions:

1. Whether P2P loans improved refinancing opportunities.

2. Whether P2P loans represent credit-building opportunities that enhance borrowers’ credit score alongside providing wider access to credit.

3. Whether having P2P loans leads to wider access to credit.

The authors find no evidence that P2P loans are used to refinance existing (credit card) debt. If anything, leverage of P2P borrowers tends to increase after P2P loan origination. P2P loans are associated with declines in credit scores as well as increased frequency of delinquencies. While P2P lenders indeed serve the riskiest sub-segment of U.S. population, P2P borrowers are over-levered and continue accessing the traditional banking credit channels alongside P2P loans.

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