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Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit

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  • Andrew Hertzberg
  • Andres Liberman
  • Daniel Paravisini

Abstract

We exploit a natural experiment in the largest online consumer lending platform to provide the first evidence that loan terms, in particular maturity choice, can be used to screen borrowers based on their private information. We compare two groups of observationally equivalent borrowers who took identical unsecured 36-month loans; for only one of the groups, a 60-month loan was also available. When a long-maturity option is available, fewer borrowers take the short-term loan, and those who do default less. Additional findings suggest borrowers self-select on private information about their future ability to repay. Received December 27, 2016; editorial decision December 12, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

Suggested Citation

  • Andrew Hertzberg & Andres Liberman & Daniel Paravisini, 2018. "Screening on Loan Terms: Evidence from Maturity Choice in Consumer Credit," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3532-3567.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:9:p:3532-3567.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy024
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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