What if borrowers stop paying their loans? Investors’ rates of return on a peer-to-peer lending platform

Pei-Fen Chen, Shihmin Lo and Hai-Yuan Tang

International Review of Economics & Finance, 2022, vol. 77, issue C, 359-377

Abstract: This research uses over 750,000 loan records from LendingClub issued from 2015 through 2018 to estimate the gross rates of return (ROR) for each loan by assuming the borrowers stop paying their loans once a default occurs. We find the probability of earning a positive return is 75.6% in terms of the total number of loans. By our calculation, the median of ROR ranges from 4.7% to 10.3% by lending to grade A through D borrowers, but ROR plummets to −6.6% to grade E-and-below borrowers. Regression analysis shows that borrowers' credit rating, loan interest rate, loan status, and paid-month are the most critical factors to influence investors’ ROR. Lastly, we offer a few investment implications and suggestions regarding participation in LendingClub.

Keywords: Credit grades; Investors' return; LendingClub; Loan rates; Peer-to-peer lending (search for similar items in EconPapers)
JEL-codes: G15 M13 O35 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:77:y:2022:i:c:p:359-377

DOI: 10.1016/j.iref.2021.10.011

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