How Does Online Lending Influence Bankruptcy Filings? Evidence from a Natural Experiment

Abstract

Online lending platforms are a potentially powerful tool to improve financial stability and minimize bankruptcy. Serving as digitally-enabled sources of credit, these platforms may reduce bankruptcy filings by helping people cover temporary financial shocks and/or refinance debt. On the other hand, these platforms may increase bankruptcy filings by allowing risky or naïve borrowers to overextend themselves financially and become caught in a “debt trap”. To investigate the impact of online lending on bankruptcy filings, we rely on a natural experiment: Lending Club’s staggered entry into 9 states. We use a difference-in- differences identification strategy and find that Lending Club’s entry increases bankruptcy filings by approximately 4%-10%. The findings support the debt-trap view and suggest a potential dark side of online lending. Our study contributes to the growing literature that examines how online platforms influence society and the economy. Our findings also have policy implications for online lending regulation.