Peer to Peer - how much money is at risk?

agent69

Aminatidi wrote: »

Ultimately as I understand it 100% of your money is at risk

Or if Lendy's London loan is anything to go by, possible more than 100% of your investment.

Albermarle

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 ..

As well as the possibility of some defaulted loan recovery , as already mentioned , you would normally have been paid some interest before it defaulted . ( and maybe some capital depending on the loan structure)
There is an element of luck involved and it is quite possible two similar investors in P2P , may have quite different end results .

bxboards

Potentially ALL your money is at risk, but that is very unlikely.

The amount of interest I earn annually from P2P - well let just say the Personal Savings Allowance, doesn't make much of a dent in my tax liability.

I use several P2P companies and at least a few like Ratesetter or Assetz Capital I treat as 30 day notice accounts - so if I need money to buy a property at auction I can have the cash ready for a typical 1 month completion timeframe.

I do S&S too but that is long term - if I'd sold out of S&S to buy property recently I would likely have made a loss, whereas with P2P with interest compounding, I'm well up.

As always if you worry about losing money, a savings account with a High Street bank with FSCS protection is your best bet - you will almost certainly lose money due to inflation though

justme111

masonic wrote: »

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.

I did not mean shares in the same entities that taken loans - one would need to find appropriate ones I suppose - they would likely to be of different type .
Are the stats you given for FC ? Do they include time before compulsory autobid?

Elika0215

Thank you all for your insight.

Can I just add some criteria to the situation and see if this changes things?

Say I used Zopa to loan to individuals. The £1000 investment is split in to £10 per loan to spread the risk. The investment is only being used to loan to individuals in the A to C risk band (i.e. the lower risk option and eliminating high risk/poor credit record individuals).

So, one loan defaulting before the first repayment has been paid, impacts your investment by 1%.

Absolute worst case scenario is Zopa go in to administration and some loans have defaulted due to a financial crisis (say as high as 40% even with those in the lower risk band).

Even then though, you still have some investments on paper with the loans that still remain active as the contracts are between you and the client. Even allowing for administration fees, in this absolute worst case scenario, I can't see a situation, short of an apocalypse, where your £1000 will leave you with a return (not a profit) of £500.

Does that seem right? If not, I'd be really interested to hear what you think could realistically happen for your return to be less than £500.

The thinking behind this is if I was to dip my toe in to the Zopa investments knowing that I can afford a loss, could I apply that logic to say I can afford to lose £500 so will invest £1000 OR I can afford to lose £500 so will invest £500.

masonic

justme111 wrote: »

I did not mean shares in the same entities that taken loans - one would need to find appropriate ones I suppose - they would likely to be of different type .

Perhaps the shares in P2P lending companies? I wouldn't invest in those, any more than I'd partake in Chip's series A funding or Revolut's funding rounds. The three major direct lending investment trusts don't look much more attractive, although the dividends would be tax free to a point.

Perhaps bond funds? It was these I was trying to reduce my exposure to when I started investing in P2P. I see trouble ahead for these following QE and their capital values being driven up to silly levels.

Perhaps the shares of REITs and VCTs? These are going to be rather more like equities, and therefore not give the same level of diversification. I hold several examples of both as part of my S&S portfolio.

Are the stats you given for FC ? Do they include time before compulsory autobid?

Good grief no! I've opened accounts with almost a dozen P2P platforms, but never FC.

masonic

Elika0215 wrote: »

Say I used Zopa to loan to individuals. The £1000 investment is split in to £10 per loan to spread the risk. The investment is only being used to loan to individuals in the A to C risk band (i.e. the lower risk option and eliminating high risk/poor credit record individuals).

So, one loan defaulting before the first repayment has been paid, impacts your investment by 1%.

A certain percentage of loans will default. It could be 5%, 10%, 50%, or higher/lower. There is no way of determining what it will be in advance.

Diversification is only good for bringing your result closer to the average result. Which of course means you are less likely to be wiped out when defaults are under 10%, but on the other hand you have to accept the average risk the platform is willing to take on. It isn't their money at risk, but it is in their interest to make as many loans as possible.

The other option is to carefully evaluate each investment opportunity so as to eliminate the most egregious, after which you stand a good chance of doing somewhat better than average.

Absolute worst case scenario is Zopa go in to administration and some loans have defaulted due to a financial crisis (say as high as 40% even with those in the lower risk band).

Even then though, you still have some investments on paper with the loans that still remain active as the contracts are between you and the client. Even allowing for administration fees, in this absolute worst case scenario, I can't see a situation, short of an apocalypse, where your £1000 will leave you with a return (not a profit) of £500.

Does that seem right? If not, I'd be really interested to hear what you think could realistically happen for your return to be less than £500.

That's not the absolute worst case scenario.

Absolute worst case scenario #1 is that you invested in a Ponzi scheme.

Absolute worst case scenario #2 is that your direct loan contract to a borrower made you liable for the borrower's losses when he ran out of funding and he's taking you to court for damages far exceeding the amount you invested in P2P.

Absolute worst case scenario #3 is that the platform's IT infrastructure is destroyed, along with backups, so that there is no record of your investments.

I could probably think of several more, but you get the idea. Not that I'm saying any of these are likely, though some have happened.

The thinking behind this is if I was to dip my toe in to the Zopa investments knowing that I can afford a loss, could I apply that logic to say I can afford to lose £500 so will invest £1000 OR I can afford to lose £500 so will invest £500.

That's not the way I'd be thinking about it. You need to weigh up the loss potential against the potential gain. I wouldn't invest £1000 for a non-trivial risk of a 50% loss if I only stood to gain 5%. I'd rather stick the money in the stockmarket where the loss potential was similar, but the potential gain significantly higher.

firestone

using your example of Zopa the other side of the coin to the risk you mention is that in theory they are not acting blind.There will be data going back decades on how personal/business debt has performed and how that effects margins etc.The same would be true of a company like Octopus who have been doing mortgages for about 20 years (and will have the property as an asset within the loan) But the real risk maybe how they handle that data and how fast they want to grow.Also Zopa & others have outside funding even from well known investment funds which you would hope means somebody is confident even if it could be pulled out i guess
It looks like you are interested in Zopa most of all and as well as P2p over the last 13 years they now have a banking licence so effect with mention of credit cards & savings accounts(but unlike the p2p with protection i guess) is turning into a challenger bank.But as has been shown by the news from the likes of Metro over the last few weeks that is no guarantee of a smooth ride
But thats not a recommendation to invest!

Thrugelmir

Possible to obtain a yield of over 7% by investing (indirectly) in in a portfolio of RMBS. Far less risky.

short_butt_sweet

masonic wrote: »

That's not the absolute worst case scenario.

Absolute worst case scenario #1 is that you invested in a Ponzi scheme.

Absolute worst case scenario #2 is that your direct loan contract to a borrower made you liable for the borrower's losses when he ran out of funding and he's taking you to court for damages far exceeding the amount you invested in P2P.

Absolute worst case scenario #3 is that the platform's IT infrastructure is destroyed, along with backups, so that there is no record of your investments.

I could probably think of several more, but you get the idea. Not that I'm saying any of these are likely, though some have happened.


That's not the way I'd be thinking about it. You need to weigh up the loss potential against the potential gain. I wouldn't invest £1000 for a non-trivial risk of a 50% loss if I only stood to gain 5%. I'd rather stick the money in the stockmarket where the loss potential was similar, but the potential gain significantly higher.

exactly: if you can live with a maximum of a 50% loss, then you could buy a world equity index tracker instead.

the maximum loss may be about the same, but when equities crash, they are likely to bounce back eventually, so the loss isn't permanent.

and the upside - maximum potential gain - is higher with equities.

and, at least provided that you buy a world equity index tracker on a well-established conventional platform, you don't have to worry about anything like the worst cases #1, #2, and #3.