Paper Number

1505

Paper Type

Complete

Abstract

Interest rates of unsecured personal loans should ideally be based on borrowers' credit risk, free from biases and inconsistencies. In practice, however, interest rates often exhibit distortions that violate this principle. This paper proposes a novel method for determining interest rates that ensures all borrowers have access to credit at rates commensurate with their repayment risk. Utilizing a comprehensive dataset from LendingClub, a major online lending platform, we demonstrate that our method reduces the interest rate gap between borrowers with different credit scores by 38.7% and eliminates biases against African American borrowers. Loans also maintain their average return on investment across different borrower groups under the new interest rates. Our evaluation employs counterfactual loan outcomes constructed through survival analysis. Our findings highlight the potential for loan providers to enhance fairness, expand credit access, and simplify the investment process for lenders by adopting a more equitable interest rate determination methodology.

Comments

07-Fintech

Share

COinS
 
Dec 15th, 12:00 AM

Leveling the Field: Equitable Interest Rates for Unsecured Personal Loans

Interest rates of unsecured personal loans should ideally be based on borrowers' credit risk, free from biases and inconsistencies. In practice, however, interest rates often exhibit distortions that violate this principle. This paper proposes a novel method for determining interest rates that ensures all borrowers have access to credit at rates commensurate with their repayment risk. Utilizing a comprehensive dataset from LendingClub, a major online lending platform, we demonstrate that our method reduces the interest rate gap between borrowers with different credit scores by 38.7% and eliminates biases against African American borrowers. Loans also maintain their average return on investment across different borrower groups under the new interest rates. Our evaluation employs counterfactual loan outcomes constructed through survival analysis. Our findings highlight the potential for loan providers to enhance fairness, expand credit access, and simplify the investment process for lenders by adopting a more equitable interest rate determination methodology.

When commenting on articles, please be friendly, welcoming, respectful and abide by the AIS eLibrary Discussion Thread Code of Conduct posted here.