Peer-to-peer lending sites: MSE guide discussion

itwasntme001

When will people learn hey?

P2P lending is just like buying a value trap / high dividend stock - incentivized by the perceived "safety" of income but in reality is anything but safe.

But who can blame the unwise?  When following the GFC rates have plummeted, creating moral hazards and pushing ordinary folk out on the risk curve to try get some sort of return.  The central bankers have explicitly encouraged such behavior.

Even Buffet himself has under-performed for many years, fallen for the airlines that have now proven to be value traps themselves.

Ehube

That made me laugh Sailtheworld!!

I think the problem many will find with RateSetter is when they first signed up the T&Cs and products they invested in were very different from what they are now. Especially that Access Market, formerly the 30 day rolling. Many would have invested knowing they could get their money out within a month or so simply by having funds paid into holding account ready for withdrawal. But didn't see or understand the change in T&Cs (Late last year?) that basically risked tying their money in in the way described above unless they pulled it there and then.

It's all the changes over the years that led me to reducing investment from what has become an increasingly complicated, but more importantly less attractive, platform.

As for the time frame in that market the peak release of investment requests were on March 16 so, still working on requests from March 12 as Ratesetter are, they are a fair distance away from it. Add on another month and a half to today and I couldn't say the year plus time frame mentioned by Mason above is unrealistic at this point.

Prism

I felt it was made all pretty clear from Ratesetter when I first invested that this might happen and I am mostly staying invested through my business (about 20k) but have put in a withdrawal request in my ISA (just 5k) so hopefully I have the funds available by next year when I do my yearly reallocation. 

masonic

Sailtheworld said:

We're seeing a run on P2P. The T&Cs people signed up to ensure it's a slow run but it's a run nonetheless. Maybe the taxpayer will come to the rescue - they usually do when unwise lending decisions are made. 

It's not really "a run" though is it - at least not if you were intending to draw an analogy with a run on a bank. Banks take deposits from customers and they use those deposits to fund their business activities. They have an obligation to repay customers but generally only have capacity to repay a minority of the total cash available for customers to withdraw, and if too many customers queue up and pull their money out, the bank fails. Contrast that with P2P, where the company does not take the money into their possession, but rather facilitates loan agreements between a lender and a borrower. The lender is not at liberty to be repaid upon demand and the money they have in their cash account and lent out to borrowers is ring-fenced from the P2P company itself. Now the end result could be the same (the failure of the P2P firm), but in this case it would be through starvation of fees as the loan book dwindles in size and they are unable to arrange new loans.

This is analogous to an open-ended property fund seeing large outflows and freezing withdrawals. Investors hoping for some sort of taxpayer bailout are going to be disappointed because there is good precedent for liquid investment vehicles trading illiquid assets doing this, Ratesetter is not failing to meet its obligations to any investor, and companies in this sector are by no means too big or too important to fail (with three having done so in the recent past without eliciting much attention at all).

Sailtheworld

There's a run on P2P. People want their money back but have to wait until the loans are repaid and keep their fingers crossed they are - that's what makes it a slow run. There's bound to be increased stress for borrowers and there's a limit to what the provision fund can support - my bet is its woefully under-funded for what's ahead which is why, according to the FT, they've got the begging bowl out for bailout money.

You don't need to many things to go wrong from here for quite an increase in defaults, Ratesetter going bust as cash flow dries up and the provision fund not doing what it says on the tin.

I really do hope they don't get funding. It's about time those of us who know that higher returns are associated with higher risk aren't asked to bailout those with spare cash who don't.

itwasntme001

No P2P platform should ever get any sort of bailout.  First there will be absolutely no upside for the taxpayer.  Secondly it creates an even bigger moral hazard then there already is following the GFC.

I would be saying the same even if I had money in P2P (although of course i would still want a bailout if it helped me financially).

masonic

Sailtheworld said:

There's a run on P2P. People want their money back but have to wait until the loans are repaid and keep their fingers crossed they are - that's what makes it a slow run.

There have been many times in the past where I've held P2P loans and been unable to sell them because nobody was willing to buy. Interestingly over at Assetz Capital, who also operate "Access" style accounts, they are talking about allowing investors to put their loan investments up for sale at a discount, creating a market in which there is likely to be a bit more demand. The ability to sell at discounts and premiums is why bond markets don't get gummed up like this when there are economic shocks. The lack of liquidity is an artefact of a market in which assets cannot be exchanged at a mutually agreeable price.

Sailtheworld said:

my bet is its woefully under-funded for what's ahead which is why, according to the FT, they've got the begging bowl out for bailout money.

I've no idea about what the FT had to say about the matter, but my understanding is the provision fund does not currently contain enough money to cover the expected shortfalls this month, so according to the T&C an interest haircut is required in order to recapitalise it. This is not optional.

Sailtheworld said:

I really do hope they don't get funding. It's about time those of us who know that higher returns are associated with higher risk aren't asked to bailout those with spare cash who don't.

Unfortunately, a bailout would result on people with no savings, and perhaps in financial hardship themselves, paying for the investment losses of relatively wealthy people. It all just makes me think consumers should be banned from putting any money in P2P. Just look at some of the recent Trustpilot reviews to see how naive some people claim to have been: https://uk.trustpilot.com/review/ratesetter.com

masonic

itwasntme001 said:

No P2P platform should ever get any sort of bailout.  First there will be absolutely no upside for the taxpayer.  Secondly it creates an even bigger moral hazard then there already is following the GFC.

I would be saying the same even if I had money in P2P (although of course i would still want a bailout if it helped me financially).

I still have some money trapped in P2P, and I don't think the taxpayer should be on the hook for any of my capital.

itwasntme001

The ones that may fail are the ones who's operating expenses can only be covered by borrowers continuing to pay on the loans and/or fees made on originating new loans.  I think that means pretty much all platforms?

The longer the current downturn, the more chance these platforms will go belly up.

itwasntme001

It was a flawed business model from the beginning.