Default Risk Within Peer-to-Peer Credit Markets | Assessing the Factors Affecting Borrower's Risk of Default

Abstract: Assessing credit risk is essential for all companies operating on the credit market. Since current literature examining credit risk rarely focus on the peer-to-peer market, this paper examines default risk within the peer-to-peer lending market to contribute to the knowledge of credit risk for investors and peer-to-peer lending platforms. Utilising regressions, hazard models and ROC-curves, this paper has found credit rating to be a better explanatory variable for default than the interest rate. New credit customers have a higher default risk than existing credit customers. Female borrowers perform better than male borrowers. Loans taken for real estate purposes perform the best, whereas loans for loan consolidation perform the worst. Finally, we suggest how key variables can be used by lending marketplaces to focus on the customers with a lower risk of default and how these marketplaces can improve their relationship with investors.