Loanpad

masonic

Sea_Shell said:

Yes, liquidity can dry up and withdrawals can be paused to enable more loan repayments to complete.

So if there was a "run" on the platform, then you may have to wait longer.

If managed properly, in theory, a platform should be able to unwind in an orderly manner, just in reverse from originally gaining investers and borrowers. 

That is the theory, yes. In practice it is dependent on the survival of the operating company. Should that fail and get replaced with administrators, costs start spiralling out of control and they ultimately must be borne by investors. Platforms that are most at risk of this are those which make a significant portion of their money by writing new loans, since this cannot happen during wind-down. Of course it is an FCA requirement to have a properly funded wind-down plan, but investors have no choice but to take that on faith. An important learning point from previous failures is that the wind-down plan becomes null and void the moment the operating company enters administration. It does not need to address that scenario at all.

Sea_Shell

masonic said:

Sea_Shell said:

Yes, liquidity can dry up and withdrawals can be paused to enable more loan repayments to complete.

So if there was a "run" on the platform, then you may have to wait longer.

If managed properly, in theory, a platform should be able to unwind in an orderly manner, just in reverse from originally gaining investers and borrowers. 

That is the theory, yes. In practice it is dependent on the survival of the operating company. Should that fail and get replaced with administrators, costs start spiralling out of control and they ultimately must be borne by investors. Platforms that are most at risk of this are those which make a significant portion of their money by writing new loans, since this cannot happen during wind-down. Of course it is an FCA requirement to have a properly funded wind-down plan, but investors have no choice but to take that on faith. An important learning point from previous failures is that the wind-down plan becomes null and void the moment the operating company enters administration. It does not need to address that scenario at all.

Do they include Loanpad?

Do they charge large arrangement fees on top of interest charged?

Does it form a large proportion of their income?

If the borrowers keep up their payments, then they keep paying interest and the loans get repaid, then the platform itself shouldn't fail.

masonic

Sea_Shell said:

masonic said:

Sea_Shell said:

Yes, liquidity can dry up and withdrawals can be paused to enable more loan repayments to complete.

So if there was a "run" on the platform, then you may have to wait longer.

If managed properly, in theory, a platform should be able to unwind in an orderly manner, just in reverse from originally gaining investers and borrowers. 

That is the theory, yes. In practice it is dependent on the survival of the operating company. Should that fail and get replaced with administrators, costs start spiralling out of control and they ultimately must be borne by investors. Platforms that are most at risk of this are those which make a significant portion of their money by writing new loans, since this cannot happen during wind-down. Of course it is an FCA requirement to have a properly funded wind-down plan, but investors have no choice but to take that on faith. An important learning point from previous failures is that the wind-down plan becomes null and void the moment the operating company enters administration. It does not need to address that scenario at all.

Do they include Loanpad?

Do they charge large arrangement fees on top of interest charged?

Does it form a large proportion of their income?

These are good questions and things to understand before investing. Loanpad states that it takes a margin on the interest charged, but it doesn't disclose how much and I don't think it discloses other fees it charges to borrowers or what proportion of its income is derived from interest repayments only. Several platforms did and do charge arrangement fees and some of these can be high. Some rolled up such fees and/or retained interest in the amount lent. Arrangement fees can be a good thing, because they provide income whether or not the borrower makes repayments in line with the agreement. A platform whose only income is derived from monthly repayments from borrowers could be at increased risk. It all really depends on the exact nature of the way the business operates, its capitalisation, and the economic situation.

There are benefits beyond the ability to charge arrangement fees to writing new loans. The ability to write new loans allows loans to be renewed, or for further tranches of funds to be raised for lending against a development project. Some platforms have had borrowers who are repeat customers and have had a long term partnership with a particular lender, and it has at least been speculated that there is a significant co-dependence on this relationship in a few instances.

Sea_Shell said:

If the borrowers keep up their payments, then they keep paying interest and the loans get repaid, then the platform itself shouldn't fail.

It isn't sufficient for borrowers to keep up their payments for a lending business to be successful. Any business will have operating costs, which may vary over time, and include regular expenses, ad hoc expenses, and unplanned expenses. The income they may receive from loan repayments, should they all be received in line with the loan agreements, is fixed. In reality, no lending business should count on all of their borrowers always keeping up their payments. In a rundown situation, the proportion of non performing borrowers increases over time as performing borrowers repay their loans. But a platform can fail for a number of reasons, an increase in borrowers not keeping up their repayments is one possibility, but not the only one. A combination of factors often contributes, while sometimes a platform is put under existential threat by a real unknown unknown, such as being drawn into vexatious litigation by a disgruntled party. This is why there exists a risk premium to P2P lending... normally.

Sea_Shell

Great info there.  Thanks.

So like with most things involving risk, we all take our own!

Hopefully "educated" ones! 😉

Albermarle

JamesRobinson48 said:

masonic said:

It isn't sufficient for borrowers to keep up their payments for a lending business to be successful. Any business will have operating costs, which may vary over time, and include regular expenses, ad hoc expenses, and unplanned expenses. The income they may receive from loan repayments, should they all be received in line with the loan agreements, is fixed. In reality, no lending business should count on all of their borrowers always keeping up their payments. In a rundown situation, the proportion of non performing borrowers increases over time as performing borrowers repay their loans. But a platform can fail for a number of reasons, an increase in borrowers not keeping up their repayments is one possibility, but not the only one. A combination of factors often contributes, while sometimes a platform is put under existential threat by a real unknown unknown, such as being drawn into vexatious litigation by a disgruntled party. This is why there exists a risk premium to P2P lending... normally.

Excellent and very helpful post, thanks.  IMHO this product seems to be a hybrid that offers potential returns in the same ballpark as those available on retail savings, but accompanied by potential risks more akin to those on retail collective investments.  Providers of cash (you or me) don't seem to be participating much in any upside, which anyhow appears quite opaque. Also, taxwise I generally find it more advantageous to realise capital gains as against interest income, so the structure doesn't particularly suit me.

When these P2P lenders really got going, the interest rates on offer to lenders were significantly better than savings accounts at the time, so there was some attraction as a diversifier for someone who felt they already enough invested in stocks and shares. 
In the early days, there were some 'too good to be true' rates on offer, and some people made a lot of money by getting in and out at the right time. However these high interest platforms largely unravelled due to too over optimistic valuations on properties, fraud, unscrupulous borrowers, bad management etc .
Some better run platforms offering more realistic interest rates, like Loanpad, are still going OK but are struggling to get new funds due to the increase in safe retail savings rates.

Albermarle

Sea_Shell said:

Yes, liquidity can dry up and withdrawals can be paused to enable more loan repayments to complete.

So if there was a "run" on the platform, then you may have to wait longer.

If managed properly, in theory, a platform should be able to unwind in an orderly manner, just in reverse from originally gaining investers and borrowers. 

It is not just about waiting for loan repayments. These property development loans are typically paid to the borrower/developer in tranches. So the next tranche will usually be dependent on the work progressing satisfactorily.
If the funding dries up mid development, the building works stop . So the security of the money already loaned is now based on a half built/finished development, which are very difficult to sell. 
So it is ultimately in the Lenders and Platform interest, to keep funding the ongoing developments, even if the platform plans to wind down ( or go over to 100% institutional lending). So loan repayments coming in are used to continue to fund these developments, so nothing left to repay lenders in the short to medium term, but hopefully a better result in the long term, as developments are finished and sold, and the full loan repaid.
This is what is happening at Assetz Capital. Luckily they are part of a bigger group so it is in their reputational interest to close everything off in an orderly manner , eventually/hopefully ....