Winners and Losers of Marketplace Lending: Evidence from Borrower Credit Dynamics

Does marketplace lending (MPL) benefit its borrowers? Using comprehensive monthly credit bureau data for borrowers on a major MPL platform, Chava and Paradkar find that, consistent with the stated purpose for the loan, borrowers consolidate expensive credit card debt, leading to lower credit utilization ratios and higher credit scores in the two quarters after loan origination. Compared to non-MPL borrowers in the same ZIP code (or ZIP 4) with identical ex ante credit dynamics, the MPL loan-induced debt consolidation substantially increases the transition probability of subprime (near-prime) borrowers to the near-prime (prime) category. Subsequently, they receive additional credit from their existing bank relationships, resulting in higher aggregate indebtedness three quarters post-origination. Consequently, there is a significant increase in credit card defaults, with the effects more pronounced for subprime MPL borrowers. Our results highlight how credit card debt consolidation through MPL platforms and the resulting information cascade to traditional banks through credit scores can leave some borrowers worse off.

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