Peer-to-peer lending: Legal loan sharking or altruistic investment? Analyzing platform investments from a credit risk perspective

Abstract

This paper analyzes the performance of peer-to-peer investments, the potential benefits of their information processing and the investor returns, based on the entire portfolio of the Estonian platform Bondora. We found that the platform’s scoring model relies on different default probabilities across countries and is weak at predicting default within countries. Alternative information could improve the models, but our analysis could not confirm this benefit of the platform. The average internal rate of return on closed transactions was –4.17%, and 42% of the loans end with a negative IRR. We concluded that P2P borrowers in the European market are mainly high- risk, bank ineligible clients, accepting even loan-sharking level interest rates, which excludes altruistic motives of investors. Even so, investors are not compensated for the credit risk.