Peer-to-peer lending sites: MSE guide discussion

TheTracker

feefy88 wrote: »

I'm thinking of lending money to a peer-to-peer lending company wellesey (with an ipad in return)

Who do you think is paying for the iPad if it isn't you?

I'd skip Wellesley, buy myself an iPad from Apple, and use a different p2p outfit.

redux

TheTracker wrote: »

Who do you think is paying for the iPad if it isn't you?

I'd skip Wellesley, buy myself an iPad from Apple, and use a different p2p outfit.

I'd skip the iPad as well.

My Hudl 2 cost £4 from Tesco after doubled cashback derived points.

DiggerUK

feefy88 wrote: »

............I was thinking as there's no guarantee your money that you invest is protected, mortgage lenders may think that I take risks with my money??

The only thing a mortgage company will be checking is what the risk to their money is. Nowadays they have to go with the 'moral hazard'

However the p2p platforms don't take any risks with their money, just yours. Seeing as they only make money, when the money is loaned out, and they 'assess' the risk in the first place, it is in their interest to make the minimum of any perceived risk.......all down to the fact that they aren't regulated in the same way that a mortgage company is anymore.
This conflict of interest is in the p2p platforms favour, not yours..._

masonic

DiggerUK wrote: »

However the p2p platforms don't take any risks with their money, just yours. Seeing as they only make money, when the money is loaned out, and they 'assess' the risk in the first place, it is in their interest to make the minimum of any perceived risk.......all down to the fact that they aren't regulated in the same way that a mortgage company is anymore.
This conflict of interest is in the p2p platforms favour, not yours..._

It's not true to say P2P platforms don't take any risks with their money. Those platforms that have provision funds will be disincentivised to take on higher risk, as the first few percent of the bad debt would be borne by them (this provision fund money is taken from borrowers, but the platform is able to pocket it when the loan successfully repays). The fact that P2P platforms don't take an equal share of risk with their money should come as no surprise to anyone, given that investment platforms in general do not do so. Open a S&S ISA with Hargreaves Lansdown, or a SIPP with Youinvest, or a CFD account with IG and you would be in a slightly worse position than you would with a P2P platform that has a provision fund, or on an equal footing with a P2P platform with no provision fund.

There are platforms in which the customer has visibility into the loans in which they are investing and others in which they don't. Presumably you are referring to the latter. Platforms do publish historical bad debt statistics, which would give the customer something to go on and they could compare this against average figures from other platforms and against conventional industry statistics. IIRC, risk assessment of the main P2P companies has historically been found to be superior to the market as a whole, with lower default rates reported than would be expected for the risk grade in general.

As you point out, these platforms only make money when they can lend out customer money, so it is very much in their interests to ensure customers do not experience higher levels of bad debt than they are expecting, otherwise the available money they have to lend out will rapidly decline as people stop investing new money, or indeed pull it out.

Thrugelmir

masonic wrote: »

As you point out, these platforms only make money when they can lend out customer money, so it is very much in their interests to ensure customers do not experience higher levels of bad debt than they are expecting, otherwise the available money they have to lend out will rapidly decline as people stop investing new money, or indeed pull it out.

Let's hope that P2P lenders aren't staffed by exbankers from the credit boom era then. As same principle applies.

Froggitt

masonic wrote: »

(this provision fund money is taken from borrowers, but the platform is able to pocket it when the loan successfully repays).

Really????

masonic

Froggitt wrote: »

Really????

Really. They don't refund it to the borrower (it's a premium, not a refundable deposit), they certainly don't distribute it among the lenders if the loan is successfully repaid, and they continue to add premiums to new loans, so provision fund premiums from repaid loans must go somewhere - where else but to the platform?

Froggitt

Doesnt it go to build up the provision fund? More loans requires more provision etc.

TheTracker

Provision funds are built by borrower charges and are usually held by a separate legal entity, so I don't think it helpful to describe it as a platform "pocketing" the money. On any platform windup typically the funds are not redistributed to lenders or borrowers but also not usually pocketed by those running the outfit, any residuals usually are targeted for charities etc.

Running a provision fund comes with overhead. Lower lender rates for one. It takes not only money to fill the provision but salaries to be paid for those who run the fund. There is also an argument that a readily accessible provision fund leads to less rigorous recovery effort.

As a lender I see such funds as overheads that I do not wish to pay for.

masonic

Froggitt wrote: »

Doesnt it go to build up the provision fund? More loans requires more provision etc.

More loans / more money on loan should be irrelevant. Taking Ratesetter as an example, the borrower is charged a "Credit Rate", which is a percentage added to the loan rate. This percentage charge paid into the provision fund would therefore lead to the provision fund increasing in percentage size each year by the difference between expected and actual bad debt. Which brings me on to your other point...

This article would seem to suggest these funds are either being held at the same level, or even decreased. Again, using Ratesetter as just one example, the provision fund stood at 3.8% of its loanbook in January 2015, after a year in which it saw defaults of 1.85%. This year, they seem to have had a much better default rate of just 0.52% - less than a third of the 2014 value, so one would expect that the provision fund should have grown by perhaps as much as 1% given the expected bad debt of 1.5% was not realised. Yet, in fact, the provision fund size has shrunk from 3.8% to 3.3%.

TheTracker wrote: »

Provision funds are built by borrower charges and are usually held by a separate legal entity, so I don't think it helpful to describe it as a platform "pocketing" the money. On any platform windup typically the funds are not redistributed to lenders or borrowers but also not usually pocketed by those running the outfit, any residuals usually are targeted for charities etc.

Running a provision fund comes with overhead. Lower lender rates for one. It takes not only money to fill the provision but salaries to be paid for those who run the fund. There is also an argument that a readily accessible provision fund leads to less rigorous recovery effort.

As a lender I see such funds as overheads that I do not wish to pay for.

I agree with your point about overheads and the consequences of a provision fund being in place on the whole. Technically, you are of course correct about 'pocketing' of those funds. The money is unlikely to be literally withdrawn from the provision fund, but instead the premiums from new loans that would otherwise have been allocated to the provision fund are pocketed by the platform. I'd argue the exact mechanics are beside the point.

There's nothing wrong in the platform profiting from lower than expected defaults - in fact, some might regard it as a positive because it incentivises the platform to avoid bad debt, which was why I proffered it as an argument against the view that platforms are in the habit of overstating the credit worthiness of borrowers.