Determinants of interest rate of peer-to-peer business loans

Abstract

The purpose of this thesis is to examine the determinants of interest rate in peer-to-peer business loans. The peer-to-peer lending is a novel business area and it is an alternative for either as an investment or as a way to raise funding. From both, the investor’s and the fund raiser’s perspective it is important to know how the interest rate is determined on the loans. Also the information offered on peer-to-peer business loans is evaluated from the perspective of screening the loans based on the fund raiser’s quality.

The tested variables are the length of the loan period, the amount of capital raised, the credit score and the delays of the repayment. Additionally the effect of the maturity of the business is tested between four time periods. The sample data is from two online platforms offering peer-to-peer business loans at Finnish markets. These platforms are Fundu and Yrityslainat.fi.

The length of the loan period and the credit score are statistically significant determinants of the interest rate. Both the length of the loan period and the credit score have a negative relation to interest rate. So, longer the loan period is and higher the credit score, the lower is the interest rate. Also the interest rates decreases when the business matures. The available information of fund raisers varies between platforms. This information has been used effectively to screen loans in case of consumer loans.