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

Fatbritabroad

I've got about 23k spread across 4 or 5 platforms. It's been good so far. I steer clear of the super high interest rates with the exception of ablrate which is my high risk bit and regard purely as a punt.

The others are ratesetter, assetz capital, lending works Kufflink.
I don't intend to add anymore and am just reinvesting. I only add new money to my standard s and s isas

Malthusian

Albermarle wrote: »

For example many of the supposed SME's borrowing money are in fact very small and are really micro businesses. These do find it difficult to get finance from banks etc especially as the bank has to do a proper DD on them which is not worth their while . So P2P helps to fill a gap in the market , although with some risk to the Investors of course.

Micro businesses like this used to get bootstrapped on the household credit card which meant that no DD was required. Obviously this has disadvantages for the entrepreneur (you don't get the protection of a limited company) but genuine entrepreneurs will take the risk on regardless, and there are any number of successful businesses of all sizes that started out this way (and lots that failed). The interest rate they had to pay to the lender probably more accurately reflected the risk.

For business that are more capital intensive there are VCs and suchlike, but these aren't micro businesses (as distinct from micro-cap).

Mispricing of risk isn't a gap in the market. Any more than there's a gap in the market for selling tenners at £9 each.

bowlhead99

Fatbritabroad wrote: »

I steer clear of the super high interest rates with the exception of ablrate which is my high risk bit and regard purely as a punt.

I have shares in ablrate as they recently did a crowdfunded fundraising round, which is equity-based hence even more of a punt than lending to one of their borrowers.

However, OP might be interested to know that ablrate and others do offer a secondaries market in which it is possible to sell off loans for something other than your acquisition cost. So, unlike with the one-sided deal he describes at Zopa: while the loans obviously carry credit risk, if you choose to sell off a loan in an environment where prevailing market rates for the same risk has risen or fallen, you might feasibly get more or less than you paid for the loan because the availability of loans paying that rate of interest for that level of risk, has improved or worsened based on 'market conditions' ; lenders genuinely compete in a market of opportunities and assess individual business plans of their borrowers to consider whether they think the loan is attractive to take on.

FatherAbraham wrote: »

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).

That sort of one-sided secondary market does not sound very good - the price at which someone is prepared to buy your second-hand loan part will be linked to market conditions. If market loan rates are rising, your low rate loan would become pretty unattractive (just like how the bond market works, with more conventional investments), but if rates are falling, the contractual obligation on the part of the borrower to pay you back £x interest per £y borrowed would be more attractive and someone would be willing to pay you a premium.

Of course if market rates are falling dramatically and the borrower has the right to just go and get finance from someone else and simply pay back the loan early, the loan may not run to the full term and then you would have to redeploy your capital at those lower market rates. Which is another one-sided risk in P2P lending - you commit your capital knowing you can't pull out early without potentially taking a haircut, yet the borrower can pull out early by paying you off. The chance of that happening will vary from place to place, as a P2P loan that acts as relatively short term bridge finance for a property development or aircraft lease will typically not get refinanced before the business plan says it might, while a personal loan to an individual to buy a car over three to five years may be easily refinanced on a whim.

jamesd

FatherAbraham wrote: »

What is P2P lending good for?

Liability matching for income needs and diversification. The reinvestment of capital can be ceased if capital drawing is needed. The five year term options are quite reasonable for income matching but not so good for capital access.

I think I last made new loans at Zopa in 2010 because I haven't thought that the expected returns make sense. Currently I think that after five years the total of interest paid and capital returned is likely to be less than the capital invested. Debt collection performance over the following 10+ years beyond the nominal term then deciding the eventual returns. Zopa's protection fund carrying out maturity matching of debt collection to loan term was very useful in eliminating the long tail effect. Naturally I'm still receiving a dribble of debt collection payments from my 2010 and earlier lending; I expected it when I did the lending.

Primary and secondary market features vary greatly.

I think that platform dishonesty, including loan and borrower descriptions, is a bigger issue than otherwise anticipated returns.

Use something - preferably several somethings - for contingency capital, though platform and loan diversification can help. I was trying to liquidate for reinvestment almost 30,000 at Collateral when it ceased trading and it had no immediate financial effects beyond a change in my investment plans.