Social & P2P Lending

[serpenteer]

Hi all,

Hopefully this is in the right place, I always thought this was a useful board on TMF, hope others think so too.

I lend with Zopa and recently posted a link on TMF about risk. A lot of people talk about risk and there are
many that I talk to that don't like ANY risk. But I think its a risk leaving money at 0.1% - 2% interest.

I have recently been investigating Zopa risk, and it seems that they are now lending to more risky customers
to help generate business. A lot of this now comes from institutions who provide over 50% of the lending funds.
Apparently they park money there whilst they think about what to do with it.

As for my personal risk, I am slowly changing from safeguard to non safeguarded lending. Safeguard currently
gives rates of 5%, whilst non safeguard, again currently gives a projected 7%. How risky is it? I don't know but
I do know that the projections on default are not correct. Actual lending rates go up as high as 25%! but my average
rate is at 12.%. I only started lending in the non-safeguard category a few months ago when it became available and have been
keeping my eye on defaults. I currently have 63% of my funds non safeguarded, which is slowly rising when safeguard
capital returns. My annualised rate for defaults is 0.11%(% of total lending) and has been quite steady for 6 months. That means that instead
of the projected 7% I am actually getting over 8% (safeguard/nonsafeguard) and on the non safeguard alone over 10%.

I'm currently quite happy with the return, but I do a full assessment of the lending every month, mainly checking for
rising defaults, which hasn't happened so far.

I'd be interested to hear others assessment of their risk. I have been reluctant to use other lending platforms but think
that it may be better to spread risk that way too, stories about other platforms would be interesting

Serpenteer

[Whitbourne]

Hi Serpenteer,

I agree that it is all about risk and reward, so just looking at the headline rate is meaningless. As a general observation, it seems to me that there is more and more savers' money chasing broadly the same amount of borrower demand. So the two possible outcomes are that rates will go down and/or quality will go down. They are not mutually exclusive of course. My approach is that if I am going to have to do due diligence anyway I would rather go for high risk and higher returns.

I don't use Zopa, I lend via LendingCrowd (where I am getting 10% gross, less their 1% fee) and Saving Stream, which return 12% with no fees but you do need to watch the individuals loans and do your due diligence. Saving Stream has an active secondary market so you can exit positions relatively quickly. Getting in to worthwhile loans is the problem, many of those on the secondary market are ones I would not want to invest in...

I also agree that you need to consider platform risk and not place too much of your savings through a single platform.

regards,

[Mull1]

Hi Serpenteer,

You might also consider Ratesetter, to spread your risk. They seem to be very similar to Zopa.
I started with Zopa some 10 years ago and have been very happy with them, so all the talk about risk seems to be unfounded.... Ratesetter to me feels even safer but DYOR.

But I believe that this 'idea' can have many forms, that are still developing. Savingstream, for example, uses asset (mainly property) backed loans. One might think that asset backed loans might have a lower interest rate than to individuals with no asset to support the loan. Ofcourse, this is not the case!!! Savingstream is up to 12%, whereas Zopa and Ratesetter are around the 5% interest.

Thus, as an investor, these loans are going to individuals and companies. Currently a vast market that is mainly met by Banks et al. P2P is still a small part. Also, to cement their position, I believe that P2P do not want any major defaults, and thus are currently quite hot on the loan quality. Thus, it would seem that rates may come down in the future, before quality comes down. Thus, I believe that now is a good time to invest, but 2 or 3 years down the line it may not be so good.

But once again, P2P is an example of the split between those who use compounding to increase their wealth and those who live in debt all their lives and end up paying out too much.

Mull

[uspaul666]

As long as a lender has 100+ loans and the default & recovery estimates are correct then non-PF is the way to go. ZOPA are the oldest p2p lender so their stats and calcs should be correct Those defaults will come but not necessarily in the first six months, maybe they'll come in February as all the Christmas spending catches up with people or perhaps 18 months into a three year loan.
As far as rates being driven down by availability of lender money I don't think that's going to be happening anytime soon. There are more and more P2P platforms arriving all the time and mostly they seem to be doing fine. Plus the fraction of lending P2P platforms do compared to banks and big institutions is still very tiny so plenty of expansion is possible yet. There seems to be a platform for every kind of lender.

[quelquod]

Zopa's stats for non-safeguarded loans are still developing, as they have broadened their borrower base a smidgeon (albeit still pretty good risks overall) for this lending class. I'm quite unsure what Zopa's reasoning is for having both the 'classic' and 'plus' classes as it rather implies that their practice of diversifying loans isn't considered too reliable. Zopa recently published their calculations for Safeguard coverage against default levels and there's a very considerable margin until actual capital erosion occurs - well over the levels of default experienced in the depths of the last recession.

As a 'founder' lender I find it odd that they now consider the Safeguard system to be the 'classic' class - 'plus' is that.