Loan default prediction by combining soft information extracted from descriptive text in online peer-to-peer lending

Abstract

Predicting whether a borrower will default on a loan is of significant concern to platforms and investors in online peer-to-peer (P2P) lending. Because the data types online platforms use are complex and involve unstructured information such as text, which is difficult to quantify and analyze, loan default prediction faces new challenges in P2P. To this end, we propose a default prediction method for P2P lending combined with soft information related to textual description. We introduce a topic model to extract valuable features from the descriptive text concerning loans and construct four default prediction models to demonstrate the performance of these features for default prediction. Moreover, a two-stage method is designed to select an effective feature set containing both soft and hard information. An empirical analysis using real-word data from a major P2P lending platform in China shows that the proposed method can improve loan default prediction performance compared with existing methods based only on hard information.

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Acknowledgements

The authors gratefully acknowledge the assistance provided by the constructive comments of the anonymous referees, which considerably improved the paper in terms of quality and clarity. This work was funded primarily by the National Natural Science Foundation of China (Grant Nos. 71571059,71331002 and 71731005), and the Humanities and Social Sciences Fund Projects of the Ministry of Education (Grant Nos. 13YJA630037, 15YJA630010).

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Correspondence to Ruiya Wang.

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Jiang, C., Wang, Z., Wang, R. et al. Loan default prediction by combining soft information extracted from descriptive text in online peer-to-peer lending. Ann Oper Res 266, 511–529 (2018). https://doi.org/10.1007/s10479-017-2668-z

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Keywords

  • P2P lending
  • Default prediction
  • Soft information
  • Topic model