TITLE:
A Model of Competition between Online Lenders Offering Differing Loan Covenants
AUTHORS:
Erik Benrud
KEYWORDS:
Banking, Loan Covenants, Product Differentiation, Competition
JOURNAL NAME:
Open Journal of Social Sciences,
Vol.5 No.3,
March
13,
2017
ABSTRACT: This paper develops a model where two online lenders compete with the interest rates charged and the severity of loan covenants imposed. The model has a stable equilibrium, which demonstrates how an increase in the number of online borrowers or an increase in the cost of meeting covenants by the borrowers will reduce the severity of the covenants required by lenders, and each of these changes will increase the difference in the severity of the loan covenant levels. An increase in the expected losses to the lender from relaxing covenants will increase the severity of loan covenants, and this will also make the levels of severity more dispersed. Additional analysis demonstrates how exogenous shifts affect the interest rates charged by the lenders and their profits.