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.
Recommended Citation
Yang, Zonghao; Gopal, Ram D.; Qiao, Xiao; and Strub, Moris Simon, "Leveling the Field: Equitable Interest Rates for Unsecured Personal Loans" (2024). ICIS 2024 Proceedings. 9.
https://aisel.aisnet.org/icis2024/blockchain/blockchain/9
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.
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