Can Investors on P2P Lending Platforms Identify Default Risk?

Rongcai Hu, Meng Liu, Pingping He, and Yong Ma
International Journal of Electronic Commerce,
Volume 23, Number 1, 2019, pp. 63-84.


Using data from Renrendai, one of the largest peer-to-peer (P2P) lending marketplaces in China, we found an asymmetric relationship between the borrowing rates and the default risks of borrowers; specifically, orders with the same interest rate may have different default risks. A counterintuitive result is that the higher a borrower’s income, the greater the default risk. Furthermore, it is found that investors may be ignorant of the relationship between certain information (income, age, education, etc.) of the borrowers and the default risk, but they pay more attention to borrower creditworthiness, loan amount, and loan term, which turn out to be the key factors in borrowers’ default risks; because they have a good knowledge of the relationship between these three pieces of information and the default risk, investors are able to identify default risk. Finally, we find that investors can learn to identify default risk.

Key Words and Phrases: Interest rate, default risk, financial asymmetry, risk identification, P2P lending.