Adverse Selection on Maturity: Evidence from Online Consumer Credit

Loan maturity provides insurance against changes in the price of credit. We examine whether, consistent with theories of insurance markets with private information, maturity choice leads to adverse selection. We compare two groups of observationally equivalent borrowers that took identical unsecured 36-month loans, only one of which had also a 60-month maturity choice available. We find that when long maturity is available, fewer borrowers take the short-term loan, and those that do, default less. Additional findings suggest borrowers self-select on private information about their future ability to repay. Thus, maturity can be used to screen borrowers on this private information.