A pricing model with dynamic repayment flows for guaranteed consumer loans

Abstract

In the literature, the pricing of guaranteed consumer loans remains largely unexplored. This paper proposes a pricing model with dynamic repayment flows for guaranteed consumer loans based on the expected net present value (ENPV) method. Our study contributes to the literature by providing a practical guide for individual lenders to invest in consumer loans. Specifically, we conduct an illustrative analysis of peer-to-peer consumer loans guaranteed by the Risk Protection Scheme (RPS) in China. The ENPV shows that the value of guaranteed loans is jointly determined by the borrowers’ Markov repayment behavior and the compensation ability of the RPS. Numerical simulations show that both the returns and losses of guaranteed loans are smaller than those of non-guaranteed loans. Further, the lenders who invest in a loan guaranteed by the RPS receive some repayments, although the borrower no longer repays the debt and the balance of the guarantee account is negative.