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Loan Pricing in Peer-to-Peer Lending

Author

Listed:
  • David D. Maloney

    (Department of Computer and Information Sciences, Towson University, Towson, MD 21204, USA)

  • Sung-Chul Hong

    (Department of Computer and Information Sciences, Towson University, Towson, MD 21204, USA)

  • Barin Nag

    (Department of Computer and Information Sciences, Towson University, Towson, MD 21204, USA)

Abstract

Lenders writing loans in the peer-to-peer market carry risk with the anticipation of an expected return. In the current implementation, many lenders do not have an exit strategy beyond holding the loan for the full repayment term. Many would-be lenders are deterred by the risk of being stuck with an illiquid investment without a method for adjusting to overall economic conditions. This risk is a limiting factor for the overall number of loan transactions. This risk prevents funding for many applicants in need, while simultaneously steering capital towards other more liquid and mature markets. The underdeveloped valuation methods used presently in the peer-to-peer lending space present an opportunity for establishing a model for assigning value to loans. We provide a novel application of an established model for pricing peer-to-peer loans based on multiple factors common in all loans. The method can be used to give a value to a peer-to-peer loan which enables transactions. These transactions can potentially encourage participation and overall maturity in the secondary peer-to-peer loan trading market. We apply established valuation algorithms to peer-to-peer loans to provide a method for lenders to employ, enabling note trading in the secondary market.

Suggested Citation

  • David D. Maloney & Sung-Chul Hong & Barin Nag, 2024. "Loan Pricing in Peer-to-Peer Lending," JRFM, MDPI, vol. 17(8), pages 1-21, August.
    • Handle: RePEc:gam:jjrfmx:v:17:y:2024:i:8:p:331-:d:1447837
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    References listed on IDEAS

    as
    1. Olena Havrylchyk & Marianne Verdier, 2018. "The Financial Intermediation Role of the P2P Lending Platforms," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 60(1), pages 115-130, March.
    2. Caglayan, Mustafa & Pham, Tho & Talavera, Oleksandr & Xiong, Xiong, 2020. "Asset mispricing in peer-to-peer loan secondary markets," Journal of Corporate Finance, Elsevier, vol. 65(C).
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