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Assignment One Nabila Binte Zahur.pdf

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Title: Peer-to-peer loan interest rates are affected by more than just FICO credit

The Lending Club is an online financial community which facilitates peer-to-peer loans. [1]
Each loan request is assigned a ‘loan grade’ based on a number of different factors, and
then assigned a particular interest rate [2]. One important variable for determining the
interest rate is the credit-worthiness of a person, which is generally determined by the FICO
credit score, and is itself calculated from a customer’s credit files [3]. A higher FICO score
generally represents lower risk for banks and lending institutions and often results in an
individual getting better (lower) interest rates [3].

In this analysis, we performed an analysis of a sample of 2,500 loans made by the Lending
Club to identify and quantify the relationship between the interest rates offered with the FICO
score, and at the same time, to assess whether any other variables played an important role
in determining the interest rate. Using exploratory analysis and standard multiple regression
techniques, we determined that while the FICO score has a very significant relationship to
the interest rate, three other factors – the length of time the loan is for, the amount funded by
investors and the number of open credit lines – were all significantly correlated to the interest
rate. This suggests that individuals who share the same FICO credit rating might very well
be offered different interest rates by the Lending Club based on these other factors.