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Topic # 196490 2-Jun-2016 09:51
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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. 

 

RISK

 

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. 

 

Re-Writes

 

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. 

 

So......Generally speaking: 

 

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. 

 

Thoughts? Experiences? 

 

But pay attention to the details. 

 

 

 

 





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BTR

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  Reply # 1564033 2-Jun-2016 09:59
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Are you willing to share what platform you are using, I've been looking into this a little bit as something to do with the spare a spare $500 every now and then. 




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  Reply # 1564035 2-Jun-2016 10:02
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BTR:

 

Are you willing to share what platform you are using, I've been looking into this a little bit as something to do with the spare a spare $500 every now and then. 

 

 

I didn't put it in the original post because I didn't want anyone to think I was advertising for them. I'm just a 'user'. :-)  

 

It's Harmoney.  





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  Reply # 1564051 2-Jun-2016 10:31
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Is there anything to stop the borrower lying about the purpose of the loan/reason for borrowing?


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  Reply # 1564052 2-Jun-2016 10:31
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Thanks for sharing your valuable experiences and lessons.

 

I've heard a number of positive stories about P2P lending (from both lending and borrowing perspectives) and quite like the mutually beneficial ideas when things are going well.

 

Apart from avoiding high risk loan applications, I am also interested in hearing if someone has dealt with unfortunate cases and how it turned out.

 

 


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  Reply # 1564081 2-Jun-2016 10:54
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I think it's a great idea, but...

 

The risk of default for individual loans mitigated by diversification/fractionalisation as the OP demonstrates is the right way to go about things - and strongly recommended by Harmoney on their site.

 

However, they're unsecured loans, and that doesn't solve the problem that if there's a general market "turns to custard" then those borrowers who'll probably be under additional stress, and probably with secured loans, cars, homes, business etc, they will default on unsecured loans first.  I assume that the 0.02% default rate on "A1" is historical.  That could change very quickly. How much? (I expect nobody knows). Of course if a general "turns to custard" happens (when - not if), then other investments will probably be hit hard anyway, though sharemarkets etc tend to recover and resume an upward trend long term, money lost on defaulted loans is gone forever.


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  Reply # 1564093 2-Jun-2016 11:13
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Thanks for sharing this information .
There is a forum on gpforums with similar posts.
As always it's the same basics. - risk , reward, diversification

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  Reply # 1564181 2-Jun-2016 12:24
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http://www.sharetrader.co.nz/forumdisplay.php?33-Peer-to-Peer-%28P2P%29-Companies

 

 




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  Reply # 1564193 2-Jun-2016 12:44
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eracode:

 

Is there anything to stop the borrower lying about the purpose of the loan/reason for borrowing?

 

 

I don't know. I guess you could apply for a loan and see how the process works...and then just don't take up the loan. That would provide insight into the process. I might try it. :-)  





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  Reply # 1564485 2-Jun-2016 19:09
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You should have a look at www.squirrelmoney.co.nz

 

Have a read on how they protect the investor a bit better than Harmoney.

 

 

 

I use both system, Harmoney i have money invested and have had very slow payments as they don't seem to run after people that are late with payments at all.  

 

Now Squirrel on the other hand is great, Payments are always on time ready to re-invest or draw down.

 

 

 

I even tested out having a loan with squirrel, they requested all the right information, checked things and still had the loan the same day.

 

Squirrel does however take longer for your money to get invested as not as many people know about it as they do with harmoney (due to trademe etc)

 

 


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  Reply # 1564627 2-Jun-2016 21:56
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Hi,

I have been investing money in Harmoney over the last six months and now have invested in around 250 loans. I never invest more than $25 in any loan and it is generating a return of 12.5% after tax.

I have 3 loans in arrears at the moment but Generally I find Harmoney chases up loans these loans and they usually clear within 2-3 weeks. I have not had any loans charged off and any that have been in arrears have been paid.

I invest in a1-e5 loans with most being in the b-c grade..

If you are nervous investor this is not the the place for you. As I only invest $25 in each loan and there is always a risk of default. However you cannot get caught up in individual loans defaulting, you need to diversify as much as possible and look at the big picture. I think people take it more personally when somebody doesn't pay and the money is lost but at the end of the day treat it like a business and as long as you are making a good return that's all you can ask for. If there was no risk the returns would be much lower and less satisfying.

That said I do not like the new fee structure they are introducing on June 13th as with fees of 15-20% on the interest coupled with withholding tax you will lose 50% of the interest straight away. This will make the "low risk" loans pretty unattractive to some investors.

I also read the share trader forum on P2P and it makes interesting reading but a lot of the comments are from the same few people so sometimes I feel things can look a bit one side sided because there could be many investors who don't know about the forum or are just happy with their returns also.

That's my five cents worth.








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  Reply # 1564639 2-Jun-2016 22:29
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The new fees are interesting.

The old fee was a percentage of the principle. The new fee is a percentage of the interest.

If it's a fee, I suspect you would only pay tax on the interest that was actually income after fees were paid, so if you're paying 17.5% of the interest earned as a fee, that should not see the total at 50% of gross interest. Depends on the tax rate, but even 33% of the post-fee return should leave you with 60% of the gross amount after fees and taxes. If your earning 12.5% then you'd still see a real return of about 8% which is pretty good.

The other aspect of the new structure is that it makes Harmoney dependent on loans performing well. Under the old structure they got their cut whether the loan performed or not.... And they did all the grading of applications. There was no survey incentive to ensure the loans were properly qualified and graded. The new fee structure means that is Harmoney get the credit worthiness wrong they are hurt along wth their investors.

I'm OK with the new fees.




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  Reply # 1564675 3-Jun-2016 01:17
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Linuxluver:

 

eracode:

 

Is there anything to stop the borrower lying about the purpose of the loan/reason for borrowing?

 

 

I don't know. I guess you could apply for a loan and see how the process works...and then just don't take up the loan. That would provide insight into the process. I might try it. :-)  

 

 

The reason I asked is that in the OP at #7 you said you would avoid a loan that was said to be financing travel. If the borrower can lie about, or hide the real reason for borrowing then a criterion like #7 does not help much.


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  Reply # 1564726 3-Jun-2016 08:12
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Good write up.

 

 

 

I threw $1000 into Harmoney (knew it was that as I read your wrtie up).

 

 

 

The rewrites have been mentioned in Mary Holm's NZ Herald column a few times - it was seen as a way to churn more fees.

 

 

 

More two cents:

 

- The rewrites mean I have to constantly check my cash balance and reinvest or withdrawal. I would have preferred to just initially invest my $1,000 and then check periodically (monthly or more infrequently) and withdrawal or reinvest the balance. Instead I could find one week I could have more money sitting doing nothing because of the rewrites

 

- I typicall only invest $25 or $50 to one borrower. Never in someone that can't be bothered writing a description and use common sense (not to go overseas). Typically prefer a home owner however am a little dubious about the home owners as given the appreciation in property prices recently most home owners would have spare equity for a home loan topup so why approach a peer-to-peer lender?

 

- Thought about investing a larger sum, say $5k-$10k at say 15% average return. I do have a mortgage so if I fix a rate at 4.99% for 5 years that's a 10% return. I would have to structure it so I can claim the interest on the mortgage loan as a business expense. $10k at 15% = $1500 - $500 interest cost = $1000 p.a. less 33% tax = $667 after tax return. Is it worth it for: a) the risk b) funds are locked in and drip fed back to you over 5 years - you dont get it back as a lump sum and there's no early withdrawal option  c) the maintenance of having to check your account because of the rewrites (then if you reinvest the rewrites you're extending the 5 year investment period)

 

 

 

 




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  Reply # 1565744 4-Jun-2016 17:53
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eracode:

 

Linuxluver:

 

eracode:

 

Is there anything to stop the borrower lying about the purpose of the loan/reason for borrowing?

 

 

I don't know. I guess you could apply for a loan and see how the process works...and then just don't take up the loan. That would provide insight into the process. I might try it. :-)  

 

 

The reason I asked is that in the OP at #7 you said you would avoid a loan that was said to be financing travel. If the borrower can lie about, or hide the real reason for borrowing then a criterion like #7 does not help much.

 

 

True. 

 

But where they do say it, I tend to avoid it. :-)  





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  Reply # 1565763 4-Jun-2016 18:48
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logo:

 

Good write up. 

 

I threw $1000 into Harmoney (knew it was that as I read your wrtie up).

 

The rewrites have been mentioned in Mary Holm's NZ Herald column a few times - it was seen as a way to churn more fees.

 

More two cents:

 

- The rewrites mean I have to constantly check my cash balance and reinvest or withdrawal. I would have preferred to just initially invest my $1,000 and then check periodically (monthly or more infrequently) and withdrawal or reinvest the balance. Instead I could find one week I could have more money sitting doing nothing because of the rewrites

 

- I typicall only invest $25 or $50 to one borrower. Never in someone that can't be bothered writing a description and use common sense (not to go overseas). Typically prefer a home owner however am a little dubious about the home owners as given the appreciation in property prices recently most home owners would have spare equity for a home loan topup so why approach a peer-to-peer lender?

 

- Thought about investing a larger sum, say $5k-$10k at say 15% average return. I do have a mortgage so if I fix a rate at 4.99% for 5 years that's a 10% return. I would have to structure it so I can claim the interest on the mortgage loan as a business expense. $10k at 15% = $1500 - $500 interest cost = $1000 p.a. less 33% tax = $667 after tax return. Is it worth it for: a) the risk b) funds are locked in and drip fed back to you over 5 years - you dont get it back as a lump sum and there's no early withdrawal option  c) the maintenance of having to check your account because of the rewrites (then if you reinvest the rewrites you're extending the 5 year investment period)

 

 

I've come to like the re-writes because they represent a chance to get some capital back much sooner than otherwise expected. 

 

I do pay attention for 5 minutes every day (most days) and re-invest funds if I have any.

 

I have thought about investing mortgage capital, but like you, it seems riskier than I'm up for....particularly as the money may be locked up for some time.....and the return would be small unless the amount invested was large. But it can't really be large because the volume of good loans isn't really there (yet?). I've put $11,000 in....plus another $500-ish in previously-earned interest. I think this gets me to the first bracket of cheaper fees when the new fee structure kicks in. My aim was to have the loans earning about $150+ / month....at which point I start thinking of it as a useful source of income....especially considering you'd have to have about $50,000 in the bank earning interest in a term deposit to match it. Granted...there will be defaults and the capital lost will undercut the apparent returns a bit. Not much if one is careful about grades and other stuff already discussed.  

 

Harmoney has talked about a secondary market where people wishing to exit loans can sell them at a fractional rate of expected return. Hasn't happened yet....and anyone involved would have to carefully look at the numbers / returns.  

 

 

 

 

 

 

 

 





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I'm on a high fibre diet. 

 

High fibre diet


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