What is P2P lending good for? (Zola, mostly)

FatherAbraham

Although I'm a current peer-to-peer lender, via a couple of the mainstream intermediaries (including the venerable Zopa, but that's not the only one), sometimes I find it hard to justify this asset class to myself.

I appreciate that I can probably earn attractive interest rates, as long as I'm happy to wait for my thousands of borrowers to slowly repay what they owe me. However, the terrible illiquidity of the assets is frightening.

The secondary market seems to be stacked against sellers of loans (if current interest rate are higher than those my loans were written at, then I have to accept a haircut on the capital received when seeking - but if my old loans were written at a higher rate, I get no corresponding capital uplift on selling).

Performing loans which have ever had repayment difficulties can't be sold at all, but no platform ever gives me an easy overview of how much of my entire loan book is tied up in such illiquid assets. This is worrying, because I have no idea what proportion can't be sold at any price.

Sometimes I think I'm picking up pennies in front of a steamroller.

More accurately, I think one's problems with P2P only really become apparent when one needs one's capital back for living expenses or an unexpected emergency. It will take at least five years to get every possible penny back (could be longer if some loans are using voluntary agreements to repay at a slower rate than we originally planned.

When I hold equities or bonds, there's a constant secondary market. Secondary markets in P2P loans are nothing like that. Perhaps it's harder to lose capital because the loans are not tradable, and the way to make them liquid is to borrow against them when one needs the money?

takesyourchances

FatherAbraham wrote: »

Although I'm a current peer-to-peer lender, via a couple of the mainstream intermediaries (including the venerable Zopa, but that's not the only one), sometimes I find it hard to justify this asset class to myself.

I appreciate that I can probably earn attractive interest rates, as long as I'm happy to wait for my thousands of borrowers to slowly repay what they owe me. However, the terrible illiquidity of the assets is frightening.

The secondary market seems to be stacked against sellers of loans (if current interest rate are higher than those my loans were written at, then I have to accept a haircut on the capital received when seeking - but if my old loans were written at a higher rate, I get no corresponding capital uplift on selling).

Performing loans which have ever had repayment difficulties can't be sold at all, but no platform ever gives me an easy overview of how much of my entire loan book is tied up in such illiquid assets. This is worrying, because I have no idea what proportion can't be sold at any price.

Sometimes I think I'm picking up pennies in front of a steamroller.

More accurately, I think one's problems with P2P only really become apparent when one needs one's capital back for living expenses or an unexpected emergency. It will take at least five years to get every possible penny back (could be longer if some loans are using voluntary agreements to repay at a slower rate than we originally planned.

When I hold equities or bonds, there's a constant secondary market. Secondary markets in P2P loans are nothing like that. Perhaps it's harder to lose capital because the loans are not tradable, and the way to make them liquid is to borrow against them when one needs the money?

Once you really understand the illiquidity from experience in P2P it outlines a lot of what you have explained and you seem to be experiencing it alright.



For many of these reasons and platform failure, in my case Collateral I am nearly out of P2P fully now. Just two defaults in Moneything at just over £500 and around £4500 in the Collateral saga. So out of the 17K odd I had in P2P I managed to get around 12k out last year, but from what I see a lot of that would not be so easy to get out this year and I still have as good as 5K in major problems, which remains to be seen if I will see any of it and I have mentally wriiten it off and I am carrying on with my other stocks investing.



I am now focusing on my stock investments and also building up dividends from investment trusts etc as well which is starting to bear fruit.


I would not invest in P2P again for many of these reasons and my own experiences of P2P. I gave it a go and got out best I can once the cracks appeared. The winding down process can be painfully slow and irritating once illiquidity bites and the run around of defaults happening or worse platform failure.



Going by your post, it seems P2P is not really for you.

FatherAbraham

Perhaps I should emphasize the question in the title. Although peer-to-peer lending send to make sense while accumulating assets, unwinding those loan contacts is not easy, and perhaps I've failed at matching my assets to my liabilities.

What liabilities are peer-to-peer loans well-matched to?

(Oh dear, the title was supposed to say "Zopa, mostly", not recall 19th-century French author Emile Zola.)

Alexland

We have done ok from a few P2P signup bonuses but the normal rate of return doesn't seem to justify the risk. Our existing investments with Kuflink and Ratesetter will both mature in the next month and after that we have no plans to reinvest - unless I get tempted by another offer...

masonic

FatherAbraham wrote: »

Perhaps I should emphasize the question in the title. Although peer-to-peer lending send to make sense while accumulating assets, unwinding those loan contacts is not easy, and perhaps I've failed at matching my assets to my liabilities.

What liabilities are peer-to-peer loans well-matched to?

(Oh dear, the title was supposed to say "Zopa, mostly", not recall 19th-century French author Emile Zola.)

As you've found, P2P is not suitable for money you might need within the next 5 years. It can be useful as a diversifier to other high risk investments, for up to 5-10% of your investments. Loans do need careful selection because there are a lot of rogue borrowers and worthless assets out there. If you weed those out through due diligence then what you are left with a worthwhile return after bad debt. It's a lot of work though and I have been gradually reducing my exposure because of this.

Albermarle

My limited experience ( four platforms ) is that regardless of the apparent risk level of the loans , the average return always seem to end up around 5 to 6% after a couple of years ( + sign up bonuses) .
Is that worth the risk of platform failure ; loan book going South in a recession ; illiquidity etc .
Probably not but I see P2P as a useful alternative investment to the usual S&S investments , as long as it is kept as small % of a portfolio .
At the moment I am withdrawing interest but not actively selling or buying . Except for a dabble on the Triodos crowdfunding site ( social enterprise/environmental loans ) . Very long term ; very illiquid and not very exciting interest rates . However the DD is a league above and it makes me feel like I am doing something useful with my money:A

DiggerUK

"I appreciate that I can probably earn attractive interest rates, as long as I'm happy to wait for my thousands of borrowers to slowly repay what they owe me. However, the terrible illiquidity of the assets is frightening. (OP)

The potential returns of P2P are a major pull when compared to savings acounts. For whatever reasons, it then seems the risks of P2P are ignored.

Getting the return of your money on demand is handy, this always seemed to me to be something that could become problematic if a quick liquidation is needed.
When I have looked at t&c's of various P2P platforms, it seems that cash goes into holding accounts very quickly, doesn't get put to work very quickly, and is hanging around for quite a while in the platforms bank account doing nothing.

I can only urge anybody with cash in P2P to consider an exit asap, these are nothing more than vehicles to sell on dodgey loans. These platforms will never be considered 'too big to fail' and bailed out..._

Malthusian

Ask not what P2P can do for you but what you can do for P2P.

Whenever anyone asks what P2P is good for the answer is always something to do with helping out a brother who can't get credit from the banks, rather than helping investors beat inflation over the long term without risking permanent losses. Which is what conventional equity investment is good for.

Jemima who borrowed £1,000 to set up an artisanal coffee van is then used as justification to funnel billions of pounds of retail investors' money into God knows where with no due diligence that any professional corporate finance practitioner would recognise as worthy of the name.

jamei305

I dipped my toe into Funding Circle a few years ago. It was surprising how many asset-backed guaranteed loans went bad, with assets turning out to be insufficient and guarantors going bankrupt.

Kendall80

I'm trying to exit P2P curently after some bad experiences (most notably the Lendy London loans).


I have 1500 remaining still locked in that I havent been able to 'withdraw' for the past 6 months which is rather frustrating. With this returned my 3 year foray into P2P would have at least been profitable but I do not hold much hope. Some loans are a year overdue. However, as my allocation to P2P was <5% of my portfolio this wont be a 'life changing' loss.

aroominyork

I'm also learning the hard way, with a stack of bad debts on Funding Circle. I still think P2P can play a role in a diversified portfolio, though I have no interest in selecting loans but instead want a 'fire and forget' option. What suits me best is Ratesetter's 1 year market - I can pick an interest rate (5.5% usually gets picked up within a week), not worry about needing someone else to take over my loan unless I want to get our early, and the Provision Book provides a good degree of cover against bad debts. The main risk I am taking is platform failure.