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  • FIRST POST
    • the learner
    • By the learner 13th May 17, 2:51 PM
    • 155Posts
    • 8Thanks
    the learner
    Why P2P borrowers pay so high interests?
    • #1
    • 13th May 17, 2:51 PM
    Why P2P borrowers pay so high interests? 13th May 17 at 2:51 PM
    I see many P2P platforms around and typically they offer investors the opportunity to lend money to people at rates between 6% to 10%.
    Most of these loans seem to be made to finance properties so I was wonderimg, why these guys borrow via P2P when banks are offering loans at lower rates nowadays?
    Is it because they are all bad quality debtors in bank's view?
    I just would like to understand before I invest £ into this kind of products.
Page 1
    • Tarambor
    • By Tarambor 13th May 17, 5:15 PM
    • 1,017 Posts
    • 693 Thanks
    Tarambor
    • #2
    • 13th May 17, 5:15 PM
    • #2
    • 13th May 17, 5:15 PM
    They borrow via P2P because their credit rating is such that they won't either get accepted or get as good rates as they do with P2P.

    The better P2P lenders will have lots of advice for investors including how to spread risk so that one non-payer doesn't see you lose all your money.
    • Gambler101
    • By Gambler101 13th May 17, 6:11 PM
    • 454 Posts
    • 1,104 Thanks
    Gambler101
    • #3
    • 13th May 17, 6:11 PM
    • #3
    • 13th May 17, 6:11 PM
    That doesnt instil much confidence that the borrowers will be able to pay back their loans, especially if the economy takes a downturn.
    The instructions on the box said 'Requires Windows 7 or better'. So I installed LINUX
    • takman
    • By takman 13th May 17, 6:36 PM
    • 2,474 Posts
    • 2,066 Thanks
    takman
    • #4
    • 13th May 17, 6:36 PM
    • #4
    • 13th May 17, 6:36 PM
    That doesnt instil much confidence that the borrowers will be able to pay back their loans, especially if the economy takes a downturn.
    Originally posted by Gambler101
    The higher interest rates take into account of the money lost due to people not repaying their loans. So if you spread your money out across 100+ loans then overall you will make money because the people who pay will offset the few that won't.
    • TheShape
    • By TheShape 13th May 17, 6:39 PM
    • 988 Posts
    • 736 Thanks
    TheShape
    • #5
    • 13th May 17, 6:39 PM
    • #5
    • 13th May 17, 6:39 PM
    I see many P2P platforms around and typically they offer investors the opportunity to lend money to people at rates between 6% to 10%.
    Most of these loans seem to be made to finance properties so I was wonderimg, why these guys borrow via P2P when banks are offering loans at lower rates nowadays?
    Is it because they are all bad quality debtors in bank's view?
    I just would like to understand before I invest £ into this kind of products.
    Originally posted by the learner
    There is p2p lending taking place at much higher rates than that also.

    There is quite a difference between residential mortgage lending and some of the bridging loans or development finance offered through some of the p2p platforms.
    • the learner
    • By the learner 13th May 17, 6:41 PM
    • 155 Posts
    • 8 Thanks
    the learner
    • #6
    • 13th May 17, 6:41 PM
    • #6
    • 13th May 17, 6:41 PM
    There is p2p lending taking place at much higher rates than that also.

    There is quite a difference between residential mortgage lending and some of the bridging loans or development finance offered through some of the p2p platforms.
    Originally posted by TheShape
    Yes, but I just consider what is the collateral you get. And usually it is always some property with a LTV of about 50/70%.
    • Brock_and_Roll
    • By Brock_and_Roll 15th May 17, 11:06 AM
    • 750 Posts
    • 719 Thanks
    Brock_and_Roll
    • #7
    • 15th May 17, 11:06 AM
    • #7
    • 15th May 17, 11:06 AM
    Very good question OP.


    As both a banker and an investor, I think I can offer a few reasons:




    1) The interest rates might be (relatively) high compared with bog standard residential mortgages but are not actually that high compared with rates for finance to SMEs


    2) The rates may seem high, but the terms are often very short - i.e. most of these property projects are 6-9 months. So banks are often not really interested - they need to make a few hundred pounds just to cover their own admin costs etc


    3) Many of the deals are "roll up interest" i.e. only paid at the end. Developers love this as it gives them flexibility and cashflow advantages, but bank's are rarely keen - they like to see monthly payments so they can see a problem coming down the road.


    4) P2P is relatively flexible and quick compared with using traditional bank finance


    5) Ultimately, risk also plays a part. There is no doubt that an 80% LTV repayment mortgage at 3% carries less risk than a 75% LTV 9-month refurbish & sell type development project at 9%. With the latter all kinds of tings could go wrong - planning issues, problems with other projects etc etc etc




    Ultimately as an investor you need to be looking for a clear track record in repaying such loans, you should spread your cash amongst investments and finally this type of investment should be limited to the riskiest 10% or so of your investment portfolio
    • elephantrosie
    • By elephantrosie 18th May 17, 1:20 AM
    • 340 Posts
    • 85 Thanks
    elephantrosie
    • #8
    • 18th May 17, 1:20 AM
    • #8
    • 18th May 17, 1:20 AM
    brock and roll- excellent explanation. where would you say is a better place to invest in this economy climate.. since you recommended less than 10% in p2p?
    Getting bored of my 9 to 5 job.
    • Brock_and_Roll
    • By Brock_and_Roll 18th May 17, 9:32 AM
    • 750 Posts
    • 719 Thanks
    Brock_and_Roll
    • #9
    • 18th May 17, 9:32 AM
    • #9
    • 18th May 17, 9:32 AM
    brock and roll- excellent explanation. where would you say is a better place to invest in this economy climate.. since you recommended less than 10% in p2p?
    Originally posted by elephantrosie



    I think the first thing to look at is the "nil risk" return rate as your bottom line. Basically, this is what return you would get from National Savings products e.g. premium bonds, investment bonds. This is of course very low, but income is tax free so extra good for higher rate tax payers.


    The second lowest risk are term savings accounts with banks / building societies as long as you don't hold more than £100k with any one institution.


    Beyond that, the risk increases as we start looking at the stock markets and corporate bonds - the lowest risk options would be to invest in tracker funds. Are you using your annual ISA allowance?




    Personally, I like to stock pick, partly to save costs but also out of personal interest, but you need to have sufficient amounts to be able to spread your investments across a significant number of stocks in order to mitigate risk against individual companies/sectors. You can also look at buying corporate bonds, which are slightly less risky than equities and provide a fixed, known return.


    I invest for income - looking at stocks that have a history of paying and/or increasing dividends. This is not very exciting and is a long term strategy - short term rises and falls in the share price do not bother me really as long as the dividends keep rolling in. However, the market is at an all time high at the moment.........


    Beyond that, there are P2P options etc


    Property investment did of course have significant tax advantages but these have been eroded significantly.


    Of course everything depends on your attitude to risk, your current financial situation and your future needs SO MOST DEFINITELY NOT INVESTMENT ADVICE
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