Odd loan amounts may point to higher default risk, study finds
Research using Lending Club data found borrowers requesting less-rounded sums defaulted more often, even within similar credit-score and loan-size groups.
By Priya Nair · Economy Reporter
· 3 min read
A study by Xiaowen Hu and Andreas Kraft finds that borrowers who ask for odd-sized consumer loans are more likely to default than borrowers who request round amounts. For everyday investors, the takeaway is that small choices in financial behavior can reveal risk that standard credit scores may miss.
The research, posted on SSRN, used anonymized data from Lending Club, the peer-to-peer consumer lending platform. Hu and Kraft examined whether the exact dollar amount requested by a borrower contained information about credit risk.
Default means a borrower fails to make required payments on a loan. Lenders price that risk through the interest rate, which is the cost a borrower pays for receiving money now and repaying it over time.
According to the study, borrowers who requested less-rounded loan amounts defaulted at higher rates than borrowers who asked for round-number loans. The pattern held across different time periods, credit-score categories and loan sizes, the researchers found.
What the loan amount may reveal
Hu and Kraft found that people borrowing amounts that were multiples of common round figures, such as 10, 100 or 1,000, were less likely to default than people who chose more irregular figures.
The study suggests that an odd amount can act as a signal. A borrower who asks for a very specific loan size may be trying to get as much cash as possible while keeping the monthly payment within a tight personal budget.
That matters because a budget with little room for error can break quickly. If the borrower has stretched to the edge of what they can pay each month, even a smaller unexpected expense can make repayment harder and raise the risk of default.
The researchers’ finding is notable because the signal appeared even when comparing borrowers with similar credit scores. A credit score is a numerical estimate of a borrower’s creditworthiness, based on past borrowing and repayment behavior. Hu and Kraft’s work indicates that the requested loan amount may add information beyond that score.
Why lenders may care
The study says consumer lenders generally do not adjust the loan interest rate based on whether a borrower asks for a round or odd amount. Hu and Kraft conclude lenders would be better off if they incorporated the amount requested into loan pricing.
That does not mean every borrower asking for an odd amount is in financial trouble. The study reports a statistical relationship in Lending Club’s anonymized data, not a guaranteed outcome for any single borrower.
The idea fits a broader pattern in finance: numbers can carry context. In stock trading, orders for odd quantities can suggest an investor is working with a fixed amount of cash rather than targeting a standard block of shares. In lending, Hu and Kraft’s study argues that the same kind of signal may show up in the dollar amount a borrower requests.
For investors watching consumer credit, fintech lenders or peer-to-peer lending platforms, the research points to a practical issue: risk does not only sit in headline metrics. It can also show up in the small details of how borrowers ask for money.
Read the study by Xiaowen Hu and Andreas Kraft on SSRN.
This story draws on original reporting from Klement on Investing.
