Peer-to-peer lending sites: MSE guide discussion

1114115117119120308

Comments

  • bigadaj
    bigadaj Posts: 11,531
    Name Dropper First Post First Anniversary
    Forumite
    From my experiences of speaking with financial advisers about the asset class, around 3-5% allocation is comfortable. Sure, there's a lot of self-directed investors who are comfortable with greater exposure within their portfolio, but I think for those who see P2P as a passive investment and perhaps don't have the time or inclination to regularly learn or monitor their investment(s) then 5-10% makes sense.

    I think the typical investor journey is start very low, monitor , then increase exposure. I think what is important to remember, however is that borrowers are not likely to default in say their 1st year of a 5-year term, so default rates forecast while some open loans are in their infancy need to be taken with a pinch of salt. Increasing exposure too quickly could be risky.

    Interesting, it's not an asset class that you'd associate with financial advisers. If it's being used as a bond proxy then a 3-5% allocation is questionable as to whether it is actually worthwhile, particularly with rebalancing.

    The other point being missed is that talking about p2p as if it is one thing is like talking about equities or bonds in the same manner.

    Returns on p2p can vary from 2% to 15% on a huge range of risks, from fully secured to unsecured with low credit rating borrowers, and across businesses and individuals.

    The odd thing is that most of the higher return element is frequently if the secured and better risk with lower loan to value. The lower return unsecured element frequently has some form of provision fund or similar, but that wouldn't be sufficient to cover large scale losses.

    I'm currently at 2-3% of net worth and looking to increase to maybe 5% over the next few months. I could see myself getting to 10% or even a little higher but couldn't see it becoming a lot higher than that.
  • aroominyork
    aroominyork Posts: 2,802
    Name Dropper First Post First Anniversary
    Forumite
    agent69 wrote: »
    One of the risks of lending in the short term markets is that if the sticky brown stuff hits the fan you might have to wait 5 years to get your money back.
    My understanding is that investors who are lending on rolling loans can always withdraw immediately. It is only one and five years fixed term loans where selling out is dependent on finding a replacement investor. Is that correct? If it is correct, I would like to understand what might happen if a huge number of rolling lenders simultaneously wanted to withdraw their funds. Could Ratesetter cover such withdrawals and if so how, and what might the knock-on effect be to interest and capital provision fund coverage of fixed term loans (it is one year loans I am interested in making)?
  • jamesd
    jamesd Posts: 26,103
    Name Dropper First Post First Anniversary
    Forumite
    edited 4 September 2017 at 1:45AM
    bigadaj wrote: »
    I wouldn't have said that's a valid comparator though, even if it is an easy option. ... A poster would be rightly ridiculed for suggesting 100% investment in the ftse all share, so I don't see why that would be a suitable benchmark. ... Comparison with say the world index in dollars might be better
    Since I was substituting P2P for UK gilts/bonds you could as easily pick a UK gilt or bond index instead of the FTSE, that being most comparable to where it'd have traditionally gone. Still, since I have quite a bit in a GBP-hedged global tracker ETF at the moment, IGWD, in 2016 its after-hedge and charges GBP performance was +8.07%. Vs 16.75% for the FTSE All Share Index total return before charges. Year to date IGWD is up 8.84% and it'll be 13.2% if that performance continues for the rest of the year.
    bigadaj wrote: »
    I'm not sure whether you beat a poor comparator with one p2p platform is particularly relevant either, it's a bit like one of my funds or shares has done well and the rest have been mediocre or worse.
    Substituting a hedged global tracker made the target much easier to beat in 2016 than the FTSE100 you criticised me for using. I don't think my P2P investments anywhere did less well than +8.07% in 2016. I don't have easy access to 2015 or 2014 calendar years or I'd have given them as well, feel free to if you can find them.
    bigadaj wrote: »
    surely if you are a follower of cape then a suitable, alternative would be to adjust your investment strategy to favour those markets which appear to offer better value
    I could try but since I had a lot in cash for much of 2016 and also much in European and UK smaller companies it's not very easy to pick an alternative equity comparator based on my shifting much of my money out of the high-CAPE US market. Similar to the FTSE is decent enough, since the cash did less well and the small caps did much better and i didn't have beating equities as my objective. Given where my equity money is currently invested it'll be very challenging for P2P to match it if its performance continues: lots of smaller companies (UK, EU and global), emerging markets and Asia-Pacific and much less in global trackers or cash.
  • jamesd
    jamesd Posts: 26,103
    Name Dropper First Post First Anniversary
    Forumite
    Drp8713 wrote: »
    With P2P defaults are a certainty, of course you could be lucky enough to not be invested in the ones that default or get at least your capital back if you do. However, if they dont default the fact that a 12% return doubles your money every 6 years is a massive attraction
    Ablrate estimates 1% loss to bad debt after security is taken and sold, I normally suggest 2% and 12% raw interest rate though my own mean raw interest rate is normally higher there. 11% or 10% still double your money pretty quickly.
    Drp8713 wrote: »
    I have about £20k in the markets in comparison, but if my returns stay above 12% and P2P survives the next financial crisis then I would have to consider increasing my S&S /P2P ratio.
    It's pretty unlikely that P2P will do as badly as a big equity drop, that's 40% and even more routine ones of 20% are worse than anything you can expect from the sort of P2P lending recommended by posters here, which are very unlikely to go to negative returns. My view is it's better to be in P2P before the equity drop then sell the P2P and buy the equities cheaper after it.
  • jamesd
    jamesd Posts: 26,103
    Name Dropper First Post First Anniversary
    Forumite
    edited 4 September 2017 at 1:39AM
    Do you anticipate increasing investment in existing P2P providers, or are you going to continue diversifying across multiple platforms?
    I'm doing some of each, partly based on tax effects - notably ISA availability - anticipated returns and the extent to which I can manage liquidity rather than relying on the chance of favourable supply-demand balance at the platform. In general I expect £50-120k each at three main platforms and smaller amounts elsewhere, either due to me running off lending at them (Zopa, Bondora), limited loan availability or returns. I have accounts at seven platforms at the moment.

    Ablrate is likely to be the platform that has the highest proportion of my money. DBW has repeatedly demonstrated that he'll try to do the right thing, and handles pre-loan disclosures, mistakes and debt collection well. Definitely not perfect and I could do chapter and verse on the platform's imperfections, but always trying to do the right thing when the inevitable problems happen. That's a critical attribute that I want to see demonstrated in platform senior management. EP at MoneyThing also scores very well on that measure, just a less attractive overall platform proposal at the moment (fixed price resale market so I have minimal liquidity control, no ISA).

    Most recently I took a 4% cashback deal on about 50k in one loan at Collateral as my first investment there. That's well above my typical per-loan exposure but I thought it worthwhile given the potential return, likely to be about 2% a month for the time the part I sell is held. Given that level of investment you can tell I was pretty comfortable with Collateral before I first stepped in there.

    I don't mind going to 25k or so if the deal seems to merit it, though I'd be looking to reduce that over time. A few k for a typical 12% loan is about right for me.

    It isn't chance that the three platforms I just mentioned don't have much in the way of bot activity, though Collateral is inadequate for my taste at the moment, just not sufficiently inadequate. That's a major turn-off for me. I want to see platforms designed so that bots (and client-side automation in general) can't deliver a meaningful level of reward for the operator vs the general investor population. The same applies to institutional money, if it can cherry-pick, that's a major negative factor.
    How would a one-click solution platform that offered portfolios with multiple P2P providers included in them sound to you?
    I think I'd find its charges an unpalatable drain on total returns and its investment selection undesirable compared to where I invest, a further drain on comparative total returns. If it's going to invest large chunks in the likes of Zopa, RateSetter and Funding Circle it's going to take quite a performance hit, but its liquidity concerns may force that choice. I'm not very likely to be a customer if I anticipate returns after bad debt and charges before tax below 10% and given the ISA availability trends that's rising towards 10% after tax as a threshold.

    The concept is nice, I just think that the real world execution constraints will make it unattractive for me. I do think that there's significant demand for a black box product, though, just that I'm not likely to be the right customer.

    Some of the lowest rate P2P investing I've done in the past five years was at about 8% at Zopa, about five years ago, and nothing that low since then. Just no need for me to do it, I have choices that look better, and sufficient time to do the required work.
  • jamesd
    jamesd Posts: 26,103
    Name Dropper First Post First Anniversary
    Forumite
    edited 4 September 2017 at 2:19AM
    I think what is important to remember, however is that borrowers are not likely to default in say their 1st year of a 5-year term, so default rates forecast while some open loans are in their infancy need to be taken with a pinch of salt.
    Depends on the P2P loans. For unsecured consumer credit lending the default rates as a percentage of loans made start high and decrease over time, peak rate depending on the particular mix but about a year into the loan is about right. Based on Zopa and Bondora experience and analysis mainly, both mostly for five year loans.

    Total number and value of defaults increases over time for a few years until collections start to overcome the ongoing new defaults. Maybe three or four years into a five year loan portfolio for the total defaulted balance to start dropping.

    For places like Zopa and RateSetter with no protection fund I might expect negative returns after bad debt (deducting whole capital balance at time of default) for four to five years at current interest rates without a protection fund to do time transformation on the debt collection activity.

    I think Zopa made a mistake dropping their protection fund, given that its value to lenders is higher at lower interest rates and higher default rates, both trends that have been evident in its lending as it's moved its proposition overall up the risk scale.

    A protection fund is also a highly desirable feature for pension investing. Even more so after crystallisation when you are prohibited by law from moving only part of a crystallised pension pot. Having £5 of defaulted loans in a ten year individual voluntary arrangement locking £300k somewhere would be a massive turn-off. I want to do P2P investing with a crystallised pension pot but a good solution to this at the platform level or a change in the law to allow splitting (and combining would be nice as well) seems to be necessary.

    Secured lending has a different profile, in part because of the risk to the lender of loss of the security, which tends to push the defaults later in time. Pawn similarly differs, I assume with a relatively high no payback at maturity level, whenever that is, and nil before then.
  • jamesd
    jamesd Posts: 26,103
    Name Dropper First Post First Anniversary
    Forumite
    edited 4 September 2017 at 2:15AM
    The key issue that makes me limit my investment in Ratesetter is not the risk of defaults, but the possibility of some event leading to a huge number of rolling lenders simultaneously withdrawing their funds, which they can do without notice. Could Ratesetter cover such withdrawals and if so how, and what might the knock-on effect be to interest and capital provision fund coverage of fixed term loans?
    My understanding is that investors who are lending on rolling loans can always withdraw immediately. It is only one and five years fixed term loans where selling out is dependent on finding a replacement investor. Is that correct? If it is correct, I would like to understand what might happen if a huge number of rolling lenders simultaneously wanted to withdraw their funds. Could Ratesetter cover such withdrawals and if so how, and what might the knock-on effect be to interest and capital provision fund coverage of fixed term loans (it is one year loans I am interested in making)?
    If you check the actual contracts you are likely to find that RateSetter is not obliged to provide you your money if it can't find replacement lenders. As they say about Access "we cannot guarantee that you will always be able to access your money. If we cannot find other funds in our market to match to your loans, you would need to wait until new money comes into the market or wait until the borrowers pay you back in the normal course of events". The mixture of loans your money is in could end up being the time it takes you to get your money back. Rolling does have quite a high concentration in loans with one year and less maturity, though, at least last time I saw a description of how it invests the money, but "Your money will be invested in loan terms between 6 months and 5 years".

    No P2P platform and no P2P protection fund is likely to provide you guaranteed liquidity or guaranteed absence of capital loss, however good a job they do of emulating it in the short term and so far.

    If there was a substantial threat of a liquidity crunch you would probably see RateSetter try to manage it by increasing its advertising spend to attract new lenders. If that appeared to be insufficient they would probably try to further manage it by decreasing new lending.
  • Ash_Pole
    Ash_Pole Posts: 308
    First Anniversary Name Dropper First Post
    Forumite
    Brunnen-G wrote: »
    Ratesetter hitting 7.5% today on 5 year loans for those who fancy it :)

    Where are you seeing this? On the rate trends page the highest 5 year that I can see matched is 6.0% on 1st Sept.
  • aroominyork
    aroominyork Posts: 2,802
    Name Dropper First Post First Anniversary
    Forumite
    Ash_Pole wrote: »
    Where are you seeing this? On the rate trends page the highest 5 year that I can see matched is 6.0% on 1st Sept.
    The graph shows trends, not each minute-to-minute or even hour-to-hour peak or trough.
  • aroominyork
    aroominyork Posts: 2,802
    Name Dropper First Post First Anniversary
    Forumite
    jamesd wrote: »
    If you check the actual contracts you are likely to find that RateSetter is not obliged to provide you your money if it can't find replacement lenders.
    Yes, that's right. What I confused was that there is no sell out charge for rolling contracts. You are right that for rolling as with 1 year and 5 year contracts, there has to be liquidity/replacement loans available.
Meet your Ambassadors

Categories

  • All Categories
  • 342.5K Banking & Borrowing
  • 249.9K Reduce Debt & Boost Income
  • 449.4K Spending & Discounts
  • 234.6K Work, Benefits & Business
  • 607.1K Mortgages, Homes & Bills
  • 172.8K Life & Family
  • 247.4K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards