Peer-to-peer lending sites: MSE guide discussion

justme111

bigadaj wrote: »

High returns are only available because of the risk, which is both in terms of the loans being serviced and repayment of capital, I try and mitigate the latter by only using platforms that offer secured lending.

Diversification helps because no platform has 100% defaults, they wouldn't last long. So the actual defaults are spread, and being in a selection of loans makes it far more,likely that only some of your loans will be affected. This is no different to equity or bond investment using funds.

If you don't understand or can't learn a little about this then you may be best avoiding p2p.

The platform does not need to have £100 defaults for an investor to have 0 return. One in 10 defaulting would result in it if the interest rate is 10% .

takesyourchances

justme111 wrote: »

Exactly , "fingers crossed". As if at 10% rate one in 10 borrowers default with no recovery one would get a big fat 0 , diversification or not. Diversification would stop one from having a 100% loss (ie getting much less than average return) but the average itself is not going to become better because of it. I must say I am not well versed in assessing the loansand when I look at loan propositions on ablrate I think "by the grace of God" as they do not look any better than other platform's' ones. Please share what makes you think they are any better. Ps - as far as I know moneything has 2 defaults.

I would not be an expert either in assessing the loans compared to others who post, before I invest I would read opinions on the P2P forum as well, but there is always that risk no matter how good something seems or is researched, unforeseen circumstances could lead to a default.

I don't have any deep information that makes Ablrate better than others, but they don't churn the loans out and seem to put out quality with assets and they have a good track record of payments being made. I am prepared to give it time to build my loans up with them.

I think with P2P also you need to be prepared to have a reasonable amount invested so that £100 and £200 loans won't dent your percentage return to 0% or negative if 1 or 2 defaults happens.

If you had £1000 in 10 loans at £100 each and 1 default or more that would badly hit. But would not be so bad if you had £10,000 plus invested and a £100 loan defaulted with no recovery.

Also with secured assets there is the chance of recovery. Collateral recovered one of the car loans I was in quickly and if my £75 is not returned in moneything, it won't dent things too much at around 0.6% of my P2P total at the moment. There is some loans I have more in which would bring returns down more, but I am keeping investing with not too large an amount in each as my overall investments grow.

Others with more experience than me in P2P can give better thoughts I am sure. I am over £12000 invested in P2P at the moment and invest most weeks so that should grow, but I am conscious to try and spread it and build my loans up to try my best to limit risks when defaults happen.

Hope my two pennies helps.

bigadaj

justme111 wrote: »

The platform does not need to have £100 defaults for an investor to have 0 return. One in 10 defaulting would result in it if the interest rate is 10% .

Yes, I used an extreme example, but what default rate are you happy with, if it's zero then best avoid p2p it's that simple. Your example of zero return is itself a little extreme, I don't use certain platforms because of higher defaults, Lendy is one and I've seen others such as funding circle or fudging secure. My approach is multi level, you have to have some confidence that the platform is doing reasonable due diligence to use them initially, then use the p2p independent forum for critical comment in indivdual loans as well as the proposal and VR or other security. There will be defaults. You could of course use Zopa or Ratesetter but for me the returns are too low with the associated risk, as their returns are implicit like a bank account you can't see how their assessment is done or how successful their due diligence or underwriting is.

However if your risk tolerance is very low then that questions whether you'd be happy with equity or any other risk investment.

justme111

takesyourchances wrote: »

If you had £1000 in 10 loans at £100 each and 1 default or more that would badly hit. But would not be so bad if you had £10,000 plus invested and a £100 loan defaulted with no recovery.

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In my hypothetical example I said one in 10 loans. So if you invested in 100 loans then 10 of them would have defaulted, not one.
Bigadaj , I understand my example was extreme , I wanted it to be clear so made it simpñistic. The issue is not what risk I personlly am happy with. The issue I highlighged is that with certain default percentage the low return/loss becomes not a risk but certainty. I just wanted to highlight it to warn about limitations of diversification which is sometimes mentioned as if it was a solution.
There is an appropriate return percentage for all risks I suppose. If defailts are one out of 30 with 50% recovery then 10% return is ok/good. If defaults are one in 10 with 0 recovery then the return percentage would have to be about 20% to compensate for it to make it worthwhile. If default rate with 0 recovery is one in 5 then appropriate interest would be about 30% and so on. As there are no such high rates on the market I wonder wherher current rates (up to 14%) are appropriate for the level of risk or not without having to dissect viability of every loan and go only for ones that seem better. Platform choice - I wonder to which extent there is a point, the favourite one of the last year has 2 defaults on it now . I know one could rely on p2p forum analysis and it is fun for token investments but it feels precarious to rely on a few usernames on the internet forum to invest more serious money.

bigadaj

justme111 wrote: »

In my hypothetical example I said one in 10 loans. So if you invested in 100 loans then 10 of them would have defaulted, not one.
Bigadaj , I understand my example was extreme , I wanted it to be clear so made it simpñistic. The issue is not what risk I personlly am happy with. The issue I highlighged is that with certain default percentage the low return/loss becomes not a risk but certainty. I just wanted to highlight it to warn about limitations of diversification which is sometimes mentioned as if it was a solution.
There is an appropriate return percentage for all risks I suppose. If defailts are one out of 30 with 50% recovery then 10% return is ok/good. If defaults are one in 10 with 0 recovery then the return percentage would have to be about 20% to compensate for it to make it worthwhile. If default rate with 0 recovery is one in 5 then appropriate interest would be about 30% and so on. As there are no such high rates on the market I wonder wherher current rates (up to 14%) are appropriate for the level of risk or not without having to dissect viability of every loan and go only for ones that seem better. Platform choice - I wonder to which extent there is a point, the favourite one of the last year has 2 defaults on it now . I know one could rely on p2p forum analysis and it is fun for token investments but it feels precarious to rely on a few usernames on the internet forum to invest more serious money.

It's personal choice at the end of the day, just read through the p2p independent forum, sometimes it's not far off the daily mail.

Platforms are saints one minute and the devil incarnate the next, just because they have experienced a default or often just not responded to a fandom query for a couple of hours.

Diversification is key and it does limit things to an extent. I have a lowest five figure sum invested across three platforms with no more than three figures in any loan, or four figures with any borrower. For many people to achieve the appropriate level of diversification requires a large number of small investments taking some time; the platforms I use often have a famine in terms of secondary market availability, or for Ablrate with a non par market then a premium to buy in.

I'm in the two recent MT defaults which are the first I've suffered having invested for 18 months. I expect to get the majority if sitar back but no certainty, that's the other thing you need to consider is that asset backed loans, so long as legally water tight, should expect a significant recovery even if this will take some time. For MT then this is a learning curve, particularly with the Birkenhead loan given the relationship they have with the introducer/ first loss provider.

Ablrate have been a bit mixed with defaults, and collaterals response with their single car loan default was quite impressive.

jamesd

What diversification does is move your expected results closer to the expected results of the platform. If a platform has ten defaults and you have ten loans, you could be unlucky and have all ten default. If you have a hundred loans then you can't get that degree of bad luck from the ten defaults because the worst case is ten percent defaulted, not 100%. Assuming your money is evenly spread between the loans initially.

You can also try to select better loans. For example, property development loans are higher risk in general than property bridging loans, because a development loan's security building being built is worth maybe half of the final value when it's say 80% complete. But either could have additional security, like another building or land with no building work involved. Different platforms do better or worse jobs of packaging up an attractive combination and it varies between loans as well.

Platform choice issues are related in part to trust and how they carry out their business. If a platform is filtering out the dross and has a good record of disclosing all you need to know to properly evaluate a loan it'll probably be a better choice than one which hides key information from you.

A classic example was the garden centre loan at Lendy, where they described the borrower as an individual (so all their personal assets at stake) but it was actually a limited liability company in which the platform took a ten percent ownership interest and the individual had only 30%. The value given was also quite inflated compared to original purchase price and it sold closer to the purchase price than the valuation given. Knowing what a place was bought for matters if you want to make good lending decisions. There can be good reasons for a price lower than the valuation but you need to know that so you can make a judgement.

A few usernames on an internet forum can have a bit of an advantage at times. If you see me writing something you can go and look back at ten years of my posts here to see how I've done in the past. You still need to do your own research and form your own opinion but others can usefully point you in the directions that their analysis and experience has shown are most likely to be interesting.

It's completely expected that MoneyThing has had some defaults. Was always going to happen. Similarly it's expected but unfortunate that a borrower defaulted at Ablrate after apparently acting grossly improperly and illegally in a number of ways. Failure and criminality are just facts of life in the lending world. Platforms and us can try to manage those risks but they will still happen. What you can learn from those in part is how well what you were told initially matches what you find out after the default and how the platform handles the default and recovery process. Collateral in their recent default had lent on the basis of buyback agreements, meaning the platform's security company owned the cars, so they were able to threaten the directors of the borrower with criminal action when it turned out that they had sold them. Abrate went with an emergency freezing order and has been quite determined with the ongoing actions there. MoneyThing is too early to really tell at the moment since the first of their two recent defaults doesn't yet have a sufficiently known outcome, though there's some wondering room about whether the borrower was really saying the costs were right given that they seem to have run out of money to complete the building work. The first two seem to be a good deal better than average, MoneyThing may well turn out that way as well, we'll see.

justme111

jamesd wrote: »

What diversification does is move your expected results closer to the expected results of the platform. .

Exactly. While that one seems to be a bit of an unknown. Who is to say it is not one in 20 defaulting?
Of course a few usernames are most useful , if it was not for p2p forum I would not have used most of platforms I do now. You say one still has to do their own research though and that seems to be the end point of it. Investing £1000s on a basis of posts on the internet forum looks like gambling and quacks like gambling. I have nothing against gambling if it is tamed as long as it is recognised as such. I doubt most participants in abl, ms and other platforms ever have read those 16 pages pdf files in loan proposals, let alone understood them. That aside even if they did crucial info about existance of other charges ahead of the platform's can be omitted so not sure how far DD can go.

Thrugelmir

justme111 wrote: »

I doubt most participants in abl, ms and other platforms ever have read those 16 pages pdf files in loan proposals, let alone understood them.

Nor would they provide the user with an indication as to the likelihood of default. Default is an inherent risk of speculation. In the world of business there are no guarantees. That's why people like to use other peoples money if it's available..........

takesyourchances

Great replies on this thread, I have just caught up and the extensive post from Jamesd was a great insight too and also Bigadaj.

A lot of what I have learnt is from this forum and in reading the P2P forum and also forming my own opinions along the way and learning hands on investing.

I don't think I can add anything more, but really enjoying the reading and educating myself further at the same time.

Froggitt

justme111 wrote: »

Exactly. While that one seems to be a bit of an unknown. Who is to say it is not one in 20 defaulting?

There's also the question of how big the default is e.g. one in twenty defaults of an average of 20% not recovered could be acceptable to one person but unacceptable to another.