Peer to Peer - how much money is at risk?

Elika0215

So, I've recently become much more active on these forums and it's becoming quite an interest!

I'm not in the market for peer to peer loans but just wanted to understand it as much as possible more than anything. This example is based on using Zopa to invest.

So, the overwhelming advice is don't take a P2P if you want to minimise risks of losing money. However, there seems to be very little information on the level of risk.

For instance,

- Billy-bob invests £1000 expecting returns of 5%. He can afford to lose £500 so thinks the risk is worth it.

So worse case scenario as I see it is if there's a financial meltdown.

- More loans unpaid but even assuming as much as 50% of those loans defaulting, you'll still receive around £500 of your initial investment.

- Zopa themselves go in to administration but as the contract is between the investor and client, then surely it's reasonable to say that you'll at least get a return of 50% on those loans.

So, the risk of losing more than 50% of the investment is if there's a catastrophe beyond anything we've witnessed (including 2008) in relatively recent times.

Again, it's just thinking out loud rather than advice. I'd welcome some opinions on my logic, or lack of..

Thanks.

Aminatidi

Ultimately as I understand it 100% of your money is at risk with zero recourse.

Personally I don't believe that's worth an extra couple of percent a year.

masonic

P2P covers a wide range of risk levels. At the lower end the loss potential is probably less than 50%, whereas at the higher end it has demonstrably been as much as 100%. There is even a case where investors in a certain P2P loan might end up losing more than the money they invested as a result of legal action.

The risk in P2P is very difficult to quantify, but if I thought there was a risk of losing 50% of my capital, I certainly wouldn't be willing to accept a meagre 5% return on my investment!

Alexland

When I have invested small amounts in P2P it was with the acceptance that without FSCS protection it could be entirely at risk.

However the risk is lower on platforms where they cut you money up into lots of small loans like Zopa. The downside of this is you see lots of little defaults occurring eroding your return.

I feel less comfortable on Ratesetter where all my money was loaned to a single borrower so there would be a problem if they defaulted and the central pot to cover bad debts was insufficient.

Ultimately without signup bonuses then I prefer my chances in diversified S&S funds which despite the volatility are less risk for a more predictable long term return.

Alex

Albermarle

I have four P2P accounts . Although all different in the end they all are paying around 6.5% after defaults . I assume in a financial recession this will drop to zero or even less.
However this does not take into account a meltdown/platform failure /fraud etc . In this case I would agree a 50% loss is as good a prediction as any . However spread over three platforms this would mean 15 % loss. Against maybe years of earning 6.5%. Of course it is a totally theoretical model as the risk can not be analysed that accurately.
In the end you pay your money and take your choice !

firestone

Elika0215 wrote: »

So, I've recently become much more active on these forums and it's becoming quite an interest!

I'm not in the market for peer to peer loans but just wanted to understand it as much as possible more than anything. This example is based on using Zopa to invest.

So, the overwhelming advice is don't take a P2P if you want to minimise risks of losing money. However, there seems to be very little information on the level of risk.

For instance,

- Billy-bob invests £1000 expecting returns of 5%. He can afford to lose £500 so thinks the risk is worth it.

So worse case scenario as I see it is if there's a financial meltdown.

- More loans unpaid but even assuming as much as 50% of those loans defaulting, you'll still receive around £500 of your initial investment.

- Zopa themselves go in to administration but as the contract is between the investor and client, then surely it's reasonable to say that you'll at least get a return of 50% on those loans.

So, the risk of losing more than 50% of the investment is if there's a catastrophe beyond anything we've witnessed (including 2008) in relatively recent times.

Again, it's just thinking out loud rather than advice. I'd welcome some opinions on my logic, or lack of..

Thanks.

seeing the mention of Billy Bob putting in a £1000 it does make me wonder how much of the money in P2P is retail and how much is institutional (and how they have assessed the risk)
You have the likes of Octopus choice with property and 5% first loss and Landbay with property and a reserve funds that have lent about £200 - 300 million each but this week Landbay said they were looking to grow the retail side in terms of lenders as it only averages 10 to 20%
You have Lending Works and their provision fund only for retail investors
And the big Three Zopo,RS and FC have lent approx 9 billion between them over the years so don't think its only Joe public and their £100 cashback on the hook

EdGasketTheSecond

Ther are plenty of shares yielding 5% to 9%; seems a lot less hassle and if you hold in an ISA or SIPP you won't pay any tax unlike P2P income where you have to complete a tax return. Of course shares might go down but they also might go up.

masonic

EdGasketTheSecond wrote: »

Ther are plenty of shares yielding 5% to 9%; seems a lot less hassle and if you hold in an ISA or SIPP you won't pay any tax unlike P2P income where you have to complete a tax return. Of course shares might go down but they also might go up.

I don't disagree with your assessment, but P2P can also be held in an ISA and even if it is unwrapped it doesn't require someone to complete a tax return.

Fatbritabroad

I hold 5 p2p accounts with about 20k in total. These are spread between high risk account, (ablrate manual selected small pool of borrowers) and what i perceive to be lower risk (assetz capital easy access and 30 day, and lending works) my biggest concern is platform default rather than individual loan defaults so I limit myself to around the 5 to 6k per platform. If all platforms went to the wall and I lost everything it'd smart like a b*tch but I'd be OK. I have 4 times that in a s. And s isa and 10 times that in a pension. I'd love to put more in but I'm being very Cautious at the moment but happy to risk the above for 6%-15% returns

justme111

Farbrit , have you thought about possibly investing in high risk venues rather than giving them loans? Because if you hit the right one I guess the investment could return 1000% , upside would be massive while loaning them money looks like downside is 100% and the max you can get is the advertised rate whatever it is?
I have about 10k in p2p speard over 5 platforms; would hurt if I lost them but not catastrophe. Looking at it now I think it is very risky - I have money stuck in collateral. Ok, it's all fun and dandy to talk about your contract with the users, not the platform and it all should working but in reality have you thought what is going to happen if your platform fails? What recourse you would have ? Administrator expenses have to be covered first ...
Even without platform collapse - if you lend money at 10% in 10 loans only one defaulted loan with a wipe out of capital in a year will be enough to get your benefit to 0. 2 defaulted ones will result in a more than 10% capital loss - do not think it is a very good business , eh ..
I tried FC - got about 4% there. I don't Thu k it is good enough for risk. Tried Moneything - 30% of my capital is inaccessible in defaulted loans. Tried ablrate- none of my loans is declared in default but some of them don't pay interest and I would not be able to sell now - like like ddeualt to me

masonic

justme111 wrote: »

Even without platform collapse - if you lend money at 10% in 10 loans only one defaulted loan with a wipe out of capital in a year will be enough to get your benefit to 0. 2 defaulted ones will result in a more than 10% capital loss - do not think it is a very good business , eh ..

My experience has been quite different. Out of several hundred loans, only approx. 5% have defaulted, of those defaulted loans about half have been fully recovered, the other 2-3% have resulted in an average loss of 60% (that's enough to reduce my average returns from ~9% to ~7%).

If I'd invested in the shares of these businesses instead of lending them money, I'd have faced a much worse outcome, and the upside potential of a business whose only assets are the properties they are developing would be limited.