I can't find any forums in NZ where investors talk amongst themselves about lending strategies in the peer context.
I've been investing with a peer-to-peer platform since October. The experience has generally been pretty good, but there are some 'lessons' I've learned along the way that I'd like to test with others who may have the same view....or an entirely different view....or just share with anyone interested.
To start, I invested $5,000. I went into the loan market place and added notes to some high-grade loans. Mainly A1 to A5. (Highest rating is A1 and Lowest is F5). The interest charged on the loan and the estimated default (they stop paying) rate depends on the grading of the loan.
Generally, these platforms can offer loans to would-be borrowers at a cheaper rate than banks or finance companies...and definitely better than the payday loan sharks. So in that sense, I'm helping people out.....and they are recognising the contribution in repaying the loans, with interest at the cheaper rate. Lowers costs. A win for everyone, really.
I invested $1,000 in 3 loans for 60 months (5 years) that were A1 or A2. Interest rates between 9.99% and 11.5%......and spread the remaining $2000 among several other loans in the A3 to B2 range. The average interest rate across it was was about 12%. That's a lot better return on capital than you'll get from a bank deposit or any kind or from renting out your Auckland house.
So then what?
Well.....I didn't see one of my $1000 investments was toward as $12,500 loan for "travel to my brothers funeral in the US". The person's income was good. The payments modest in relation to the income and their grading was an A2. Just about as good as it gets. They should be able to easily pay this loan.
They didn't. In 7 months they've made one payment.....just enough to keep the lan fro being written off. So I'm now missing out on just over $100 in payments on the loan, most of which would have been interest. I'll probably lose almos all of that $1,000. I should have taken note that this was - explicitly - leaving the country.
My mistake? Investing too much in one loan and not heeding the clear intentions of the borrower and the related risk. Lesson learned.
As for the rest of my portfolio (I've added more money since), every other loan (92 of them now) is performing just fine.
I also soon found that people who already have loans tend to "top them up". The cap is $35,000. But someone with a loan at 11% for $12,000 might find it advantageous to get a new loan (a re-write) for $20,000 for some new thing (home reno, consolidate other, more expensive debt form elsewhere, etc...). When this happens, a new loan goes onto the market and when it's notes ($25 each) are filled, the existing loan is paid out - I get all my money back. I might be an investor in the new loan....or I might not. I can re-invest those funds elsewhere or simply withdraw them. So far, it looks like about 10% to 20% of loans are re-written within a 6 month period. But this also represents risk as someone who isconstantly borrowing more may face a nigher interest rate, larger payments.....and be headed toward a debt they can't easily afford, eventually.
Worth keeping in mind. Is the borrower sliding down the hill out of control? You don't want to be in any of their loans when they get there.
1. Now I rarely invest more than $100 (4 x $25 notes) in any single loan....no matter what the grade.
2. I tend to favour loans of 36 months (3 years) duration. Five years is a long time these days.
3. I tend to favour loans where total amount being borrowed is under $20,000.
4. I tend to favour loans where the monthly payment is less than 15% of the declared income. Definitely less than 20%.
5. I tend to favour loans where the person is consolidating debt at an interest rate that will see them saving money vs credit card or finance company borrowing (the latter can be %1,000/ annum on pay-day loans!!!).
5. I generally avoid loans where the borrower has already had several re-writes. They feel out of control.....digging an ever-deeper hole. Though you might calculate THIS re-write will be OK at $20,000...but definitely not the next one and definitely not at the cap of $35,000.....nowhere to go from there.
6. I generally avoid loans where the interest rate is higher than you'd pay on a credit card - 21%-ish max. (an F5 graded loan can see the interest rate close to 40%....but the default rate is over 15%....whereas the default rate on an A1 grade is close to 0.02%.
7. I avoid loans for travel or where the borrower says they are leaving the country for any reason.
8. Borrowers can add comments about what they want the money for. I tend to avoid loans where the borrower says.......nothing.
9. Avoid the 19yo who wants money to pimp their car, has a low wage and lives with Mum and Dad. Second re-write. Graded F2. That sort of thing. Just saying.
The rate of return I'm seeing so far (bar the loan that isn't performing - it's become a small part of the total) is about 12.5%. Take taxes and fees off that and it's still well over 8% in real terms. So far, I have re-invested the interest as new loan notes....so my interest is earning interest.
You can't drop $100,000 into this.....the loans just aren't there to fill in that sort of volume. But if you'd like a potential gross return of about $1400 / annum on an investment of about $12,000......built up over time as new loans come onto the market....then this is a pretty good deal over all.
But pay attention to the details.