Determinants of Interest Rates in the P2P Consumer Lending Market:
How Rational are Investors?
Andreas Dietricha, Reto Wernlia*
Version: April 17, 2019
In an ideal world, individuals are well informed and make rational choices. Regulators can fill in
to protect consumers, such as retail investors. Online peer-to-peer (P2P) lending is a rather new
form of market-based finance where regulation is still in its infancy. We analyze how retail
investors price the credit risk of P2P consumer loans in a reverse auction framework where
personal interaction is absent. The explained interest rate variance is considerably larger than in
comparable studies using bank loan data. Our results indicate that retail investors act rational in
this weakly regulated environment. This seems surprising when considering the limited set of
information provided to the investor. Factors representing economic status significantly influence
lender evaluations of the borrower’s credit risk. The explanatory power of loan-specific factors
increase as the market for P2P consumer loans matures. Furthermore, we find statistical evidence
of some discrimination by the lenders with respect to nationality and gender.
Key Words: Loan rates, Price discrimination, Peer-to-peer lending, crowdfunding,
crowdlending, marketplace lending
JEL Classification: D12, G21, J16, J71
Funding: This research did not receive any specific grant from funding agencies in the public,
commercial, or not-for-profit sectors.
a Institute of Financial Services IFZ, Lucerne University of Applied Sciences, 6300 Zug, Switzerland
* Corresponding author / E-mail: firstname.lastname@example.org / T: +41 41 757 67 13 / ORCID: 0000-0002-6591-6349
Determinants of Interest Rates in the P2P Consumer Lending Market: How Rational are Investors?
A wide range of empirical studies in finance has shown the limitations of the traditional
rationality paradigm (Barber et al., 2008; Barb