Peer-to-peer lending sites: MSE guide discussion

jamesd

Froggitt wrote: »

Risk averse/safeguard fund.

So why not go for 12% with LTV of 80%, no cap on the total amount that can be paid out and all defaulted end user loans replaced unless the borrower in the middle fails?

That's the sort of proposition being offered by the loans made via MoneyThing to a business with initials AE that does HP car sales of vehicles that have built in trackers. If their customer defaults they just replace that loan in the basket of security with another one. LTV is 80% of retail car resale value and no more than 50% of the HP payments value. Unless the firm AE fails that's no loss at all, the 80/50% only happens if they do fail and stop replacing the HP contracts.

More generally why go with a protection fund when there's the option of having security at decent LTV instead, with no limit on the amount that can be paid out in total?

Protection funds can be useful but the Safeguard fund at Zopa isn't being funded at a level sufficient to cover the 2008 level of defaults and Zopa has been ramping up the risk level, from 1.3% expected defaults before Safeguard in 2013 to 3.24% now. 2008 defaults were 4.18% and expected defaults after they adjusted them upwards to be more realistic were 3.58%, the original expected default level was more like the 2.74% in 2007.

smoulder

If I was a borrower, why would I wantto use a P2P site like MoneyThing or Ablrate that offered lenders 12% rates instead of (I imagine) the lower rates available through RateSetter etc? Even though I offer an asset as security, I'm still paying a high rate of interest. Must be because I am a more risky borrower, no?

Kendall80

smoulder wrote: »

If I was a borrower, why would I wantto use a P2P site like MoneyThing or Ablrate that offered lenders 12% rates instead of (I imagine) the lower rates available through RateSetter etc? Even though I offer an asset as security, I'm still paying a high rate of interest. Must be because I am a more risky borrower, no?

Not necessarily. They may be short term loans for which often a higher rate is charged.

jamesd

smoulder wrote: »

If I was a borrower, why would I wantto use a P2P site like MoneyThing or Ablrate that offered lenders 12% rates instead of (I imagine) the lower rates available through RateSetter etc? Even though I offer an asset as security, I'm still paying a high rate of interest. Must be because I am a more risky borrower, no?

No. Depends more on the nature of the loans. Borrowers are often using loan brokers to get the best terms.

Take those car HP deals. The end buyers are consumers who are high risk and it's often done without credit checks. That's why all of the vehicles have trackers and other gizmos installed. But this doesn't matter so much to lenders because they are lending to the HP business, not the HP consumers. Yet those consumers pay a lot for their HP deals and that gives the business an incentive to grow, which it is funding through the P2P borrowing.

Similar reasoning applies to the pawn loans there, the pawn shop chain is a business and it doesn't matter much that their customers are poor credit risks because the business is holding their goods.

Property development finance is another area where standard lending rates are high and it's possible to pay lender 1% while still making a nice profit for the platform and a competitive rate to the borrower. SavingStream these days is mostly this type of loan. Be selective, not all deals are of the same risk level.

Ablrate has done a fair number of loans to a business that orders shipping containers from the main maker in China then resells them while they are being made or in transit. The profit there comes in part from the container being full on the way here and partly from the buyers of the container paying a premium over manufacturing cost to not have to wait the many months of time it takes to get a container made and shipped. The loans are secured on the containers. Not likely to be more of these, though, they just arranged a £600k or so replacement deal to provide ongoing financing. This one started out as essentially similar to invoice financing.

It's worth thinking of what happens in recessions: boom times for pawn and high risk HP but not so great for property new building. But the property deals are typically twelve months and that's probably not going to be too painful.

Opportunities exist, it's just a case of picking the interesting ones and being willing to be patient while waiting for them to show up. And not putting too much money into any one deal, however attractive it looks.

jnm21

What is happening to Ratesetter rates? Seem to be plummeting - almost looks like someone has been putting cheap money on the markets to force rates down - been loans matched at like 2% which is crazy for a capital at risk product. Their market rate system may be susceptible to manipulation.

I think there should be a newsletter note in case MSE folk don't realise the rates their money is being lent at.

Froggitt

jnm21 wrote: »

What is happening to Ratesetter rates? Seem to be plummeting - almost looks like someone has been putting cheap money on the markets to force rates down - been loans matched at like 2% which is crazy for a capital at risk product. Their market rate system may be susceptible to manipulation.

I think there should be a newsletter note in case MSE folk don't realise the rates their money is being lent at.

Your reinvestment order O710558255025 for £17.90 at 2.1% in the 3 Year market within your Everyday account has been matched

:eek: Wonder if I can set my reinvestment option to Zopa.

archery

Froggitt wrote: »

Your reinvestment order O710558255025 for £17.90 at 2.1% in the 3 Year market within your Everyday account has been matched

:eek: Wonder if I can set my reinvestment option to Zopa.

you can set the rate you would like your money re invested.
I have used ratesetter 5 year market for some time and will
no longer accept less than 6% have set re investment at 6.6%

JohnRo

I wonder how many people investing at Ratesetter in the 5 year market just look at the headline rate and think that's what they'll end up getting back.

It'd be interesting to have a survey of lenders and see how many realise the headline rate is only applicable while the repayments are being reinvested back into the same market at the same rate of return and that any reinvestments at lower rates will dilute the original expected return.

Also how many realise the loan amortisation effect on the rate of return over the 5 year withdrawal phase won't be anything even close to the headline return.

jamesd

Just like any savings or current account you only get interest for the time your money is invested. Up to you to reinvest it to get the rate if you want to do that.

bowlhead99

jamesd wrote: »

Just like any savings or current account you only get interest for the time your money is invested. Up to you to reinvest it to get the rate if you want to do that.

Judging by some of the naive comments on this board there are probably people that think that a loan paying back a small amount of interest and principal each month is just the same as investing the money all on day one and getting it back at the end like a bank deposit - and will be disappointed at the end when they get less than they were hoping if they never took a peek as they were going along.

Of course, that's the exact same mindset that gets disappointed when they have a "5% regular saver" that ends up only actually earning money on what's been deposited at a point in time rather than what's invested by the end.

Same effect but opposite way round - they just haven't thought it through and the platforms probably don't spoon-feed them such common-sense comments because it would be bad for business to insult the intelligence of some customers while putting others off.

In rising interest rate markets it's no real hardship to have an amortizing loan being paid back to you mortgage-style with the opportunity to redeploy the cashflows for the shorter remaining term but at a better rate. It might be annoying when a solvent borrower pays you of quickly and refinances instead of letting you lend to him for multiple years at a time. You do of course need to select shorter terms for the re-deployed cash -or use something with a liquid secondary market - if you want to be able to get the whole lot out at roughly the same time at the end of the original "term" to which you'd first planned to commit.

The problem with the above is that while we could be in a general rising interest rate environment in terms of what's offered across the financial services industry when base rates go up, the rates for a given provider might be going down instead, as the platform or general p2p market matures and supply of lenders / demand to lend, rises.

So it stands to reason that you need to be vigilant, not auto-reinvest loans without screening them etc, if you want a good return. The hassle factor of doing that is why I am not heavy in p2p, as you have to "work" for your money which is time consuming. Others love it. Or at least, tolerate it as a necessary evil to get the "market beating" returns.