Marketplace lending and consumer credit outcomes: evidence from prosper

ABSTRACT

In 2005, Prosper launched the first peer-to-peer lending website in the US, allowing for consumers to apply for and receive loans entirely online. To understand the effect of this new credit source, we match application-level data from Prosper to credit bureau data. Post application, borrowers’ credit scores increase and their credit card utilization rates fall relative to non-borrowers in the short run. In the longer run, total debt levels for borrowers are higher than those of non-borrowers. Despite increased debt levels relative to non-borrowers, delinquency rates for borrowers are significantly lower.

KEYWORDS:

• Marketplace lending
• peer-to-peer lending
• consumer credit
• prosper marketplace

Acknowledgement

We would like to thank seminar participants at the Federal Reserve Board of Governors, and conference participants at the 2018 Consumer Finance Round Robin and the 2019 Financial System of the Future Conference for insightful comments. All errors are our own. The analysis and conclusions set forth are those of the authors and do not indicate concurrence by other members of the staff, by the Board of Governors or by the Federal Reserve Banks. Dore can be reached at 202-452-2887; [email protected]. Mach can be reached at 202-452-3906; [email protected].

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ See Ausubel (1991) and Grodzicki (2017) for evidence on the level of competition in the credit card market.

² For an overview on financial literacy, see Lusardi and Mitchell (2014).

³ For example, Cespedes (2017) finds that unsophisticated borrowers on Lending Club do not optimally choose loan amounts to minimize borrowing costs. See also Laibson (1997), Moore (2003), Lusardi and Mitchell (2007), Campbell (2006), Stango and Zinman (2009), and Agarwal et al. (2015).

⁴ In our sample, the credit scores of individuals with one application decline by 14 points from the quarter before the Prosper application to four quarters after the application on average. For individuals with two or more applications, credit scores decline an average of 2 points over the same time frame.

⁵ Bhutta (2014), Carell and Zinman (2014), and Bhutta, Skiba, and Tobacman (2015) also study the effects of payday lending on consumers.

⁶ For instance, Stegman (2007) reports that 80% of payday loans are for less than $300, with fees typically being $15 to $30 per $100 borrowed. Loans are repaid on the next payday, so loan duration is typically one to two weeks.

⁷ Institutional investors may also choose to fund entire loans on a large scale through Prosper’s whole loan channel.

⁸ According to Prosper’s 10-K filing for 2016, for an application to be listed on the marketplace, the applicant must have a FICO score of 640 or above, a debt-to-income ratio below 50%, a stated income of greater than $0, no bankruptcies filed in the previous 12 months, fewer than five credit bureau inquiries in the previous six months, and a minimum of three open trades listed on their credit report. These minimum criteria have varied slightly over time. Repeat borrowers are subject to slightly different requirements.

⁹ For additional information on the CCP, see Lee and van der Klaauw (2010).

¹⁰ of the population with a credit report and SSN, we match 18,823 applications, or approximately 2.5%.

¹¹ See Appendix Table 1 for definitions of key variables.

¹² If a loan is not fully funded by investors, Prosper may offer a partial loan to the applicant. The funding threshold is the minimum amount of funding required for a partial loan to be offered, set at 70% for our period of analysis.

¹³ See the Online Appendix for additional analysis of the quality of the matching algorithm.

¹⁴ Among applications that were funded, we cannot distinguish loans that are not made because Prosper opted not to fund the loan (due to inability to verify something on the application) from loans that are not made because the applicant opted to not originate the loan.

¹⁵ A simple regression using our CCP data suggests that a decline of 10 percentage points in credit card utilization rate is associated with an 8 to 15 point increase in credit score, holding total debt constant.

¹⁶ The results are largely similar for delinquencies of alternative durations.