The Democratization of Personal Consumer Loans?

Determinants of Success in Online Peer-to-Peer Lending Communities

June 2008

Abstract

Online peer-to-peer (P2P) lending communities enable individual consumers to borrow from, and lend money to, one another directly. We study the borrower- and loan listing-related determinants of funding success in an online P2P lending community by conceptualizing loan decision variables (loan amount, interest rate offered, duration of loan listing) as mediators between borrower attributes such as demographic characteristics, financial strength, and effort prior to making the request, and the likelihood of funding success. Borrower attributes are also treated as moderators of the effects of loan decision variables on funding success. The results of our empirical study, conducted using a database of 5,370 completed P2P loan transactions, provide support for the proposed conceptual framework. Although demographic attributes such as race and gender do affect likelihood of funding success, their effects are very small in comparison to effects of borrowers' financial strength and their effort when listing and publicizing the loan. These results are substantially different from the documented discriminatory practices of US financial institutions, suggesting that individual lenders lend more fairly when their own investment money is at stake in P2P loans. The paper concludes with specific suggestions to borrowers to increase their chances of receiving funding in P2P lending communities, and a discussion of future research opportunities.

Authors

Michal Herzenstein
Assistant Professor of Marketing
University of Delaware

Rick L. Andrews
Professor of Marketing
University of Delaware

Utpal M. Dholakia
Associate Professor of Management
Rice University - Jesse H. Jones Graduate School of Management

Evgeny Lyandres
Assistant Professor of Finance
Rice University

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