Peer-to-Peer Lending Advantage: Geographical Targeting (or avoidance)

Back when I worked for a large bank, I was part of a project to re-create our credit models to remove one variable that was deemed too risky to use anymore. In other words, I was making a new investing algorithm to decide who was approved and denied credit.

What was this variable that was too risky to use? It was a geographic variable that approximated where the person lived. Let me explain…

Banks have been forbidden to “redline” for years – the process of refusing to lend to certain specific areas, usually determined by zip code. The reason this practice was banned was because banks used it to deny credit based on race – an absolutely horrible practice of prejudice.

At the bank, our variable wasn’t used to redline. In fact, it was a fairly broad regional indicator that allowed us to weigh macroeconomic trends. But it was deemed too risky to use. As a result, our models became worse at predicting credit worthiness. Removing the variable cost the bank millions of dollars in profit each year – all because of a simple variable.

What does this have to do with Peer-to-Peer Lending? When you invest in Peer-to-Peer lending, you can choose any geographies you want to invest in (or avoid). This is a big advantage for a discerning investor. Geography is an important variable in Peer Lending Advisors’ models, while banks can’t use it to their advantage.

  • Peer Lending Advisors is more likely to invest in loans in areas that are doing well economically. For example, Austin, Texas, which has a booming economy. Similarly, Peer Lending Advisors is more likely to invest in areas that have benefited from the boom in Natural Gas exploration – those borrowers have good job stability.
  • Peer Lending Advisors is less likely to invest in loans from economically depressed areas, like Detroit, Michigan, Harrisburg, PA, and many parts of California. Job prospects in these areas are lower. It’s not that these areas aren’t considered at all, but it takes a much better opportunity to consider loans in these areas – measuring risk and reward.

Banks can’t discriminate based on location – in fact, by law they can’t even consider much of that data. But through Peer-to-Peer lending, you can, and that’s a huge advantage.

Interested in learning more about how Peer Lending Advisors uses data like Geographical Targeting to make great data based investment decisions? Contact Peer Lending Advisors.

 

 

Posted in Computer Algorithm
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