Peer-to-peer lending

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Peer-to-peer lending

Postby mongolking » Thu Jan 15, 2015 10:16 pm

Anyone here tried peer-to-peer lending yet?

(That's where individuals with spare cash make loans to other individuals who want to borrow via an internet application - no bankers or other middle-men involved).

I'm looking at a new local start-up called 'Harmoney', with a view to lending maybe $1000 and see how it pans out. The interest rates are high - same vicinity as credit cards. Prospective borrowers are all classified according to risk profile, and the default rates for each rating is clearly specified. Most loans are short term - 30 or 60 days.

I'd be interested in anyone's experience, either as lenders or borrowers.
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Re: Peer-to-peer lending

Postby Jackalope » Thu Jan 15, 2015 11:59 pm

Depends how high the interest rate and what the risk is. Borrowers are likely people who have been turned down for unsecured cash loans by a bank. Assume an astronomical interest rate on a 30 day loan, say 36% for the year so 3% a month. You might get 12 good borrowers and then the 13th disappears with the $1000. You're not left with much. If you have 1/30 borrowers default you make no money. I don't personally like the odds.

Also what is "Harmoney"'s cut?

Sounds like quite a racket. Normally, you give a bank your money, they give you 1% and lend it for 3-4%. They assume the risk.

In this case it's probably more like Harmoney gets the smaller percentage but you assume the risk.
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Re: Peer-to-peer lending

Postby Dr Fu-Manchu » Sun Jan 18, 2015 6:54 pm

mongolking, I'm not sure what the laws are like in your neck of the woods (or indeed what jurisdiction the P2P lender you are considering operates out of), so these are just some general observations which may or may not be applicable to you.

Money in the bank is generally protected from theft (via security and insurance) and the bank going bust (by Government guaranteeing deposits up to a certain amount), so is relatively safe even if the interest rates are ineffectual.

However, money loaned out is 'capital at risk'...I would read the small print very carefully to see what guarantees there are on your money if the P2P lender (rather than the end user/recipient) were to suddenly go bust. What rights do you have in such a situation, and what 'seniority' (if any) will your claim have versus other creditors, such as corporate lenders who loaned money to the P2P lender itself rather than through the P2P lender to a third party.

If the recent Swiss Franc uncapping has shown anything, it is that when these things start going in the wrong direction, businesses that were presumed to be rock solid suddenly get seriously crushed...like Alpari's UK arm. The 2008 credit crunch stemmed from people being unable to make payments on their sub-prime loans and mortgages, thus turning the collateralized debt obligations and other securitised and traded debt products into worthless junk, with catastrophic results.

A similar sort of situation, with many people defaulting on loans at the same time could quite easily send a few P2P lenders to the wall. Lest we forget, there is a reason the borrowers will be using a P2P lender, and most likely that is because their credit history/score is not good enough to secure a loan through traditional channels, where the qualification criteria tends to be a little more stringent (or at least one hopes this would be the case).

Also, because they are pariahs in the mainstream loan market, they have less choice and less leeway in terms of negotiating a rate, hence they will tend to plump for a rate that is not as low as a mainstream loan...it is from this fatter spread that both the P2P middleman and the lender take their respective cuts.

Of course, one need not be a genius to put together (poor credit history) + (needs loan desperately enough to settle for higher rate) + (Higher rate will make both servicing of the debt and total loan amount much more expensive) is going to a equal an extremely good chance of default...and then we're basically back in the 2008 situation again.

If you haven't read Michael Lewis' "The Big Short", I think you might find it illuminating, but as far as I can see these P2P lenders will eventually become what sub-prime lenders were, if they're not already...and we know how that one panned out.
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Re: Peer-to-peer lending

Postby mongolking » Sun Jan 18, 2015 7:09 pm

Yep, I'm having serious second thoughts about it.

The only charge to the investor is a flat-rate cut of 1.25% on both interest and principal. Seems painless enough at first, until I realised that was per loan - and since most loans are short-term, they get to take 1.25% x 12 = 15% in a year on 12 30 day loans.

Factor in the default rate and there's nothing left in it - and that's before considering the risk of the p2p provider.
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Re: Peer-to-peer lending

Postby osantium » Sun Mar 15, 2015 7:00 pm

If it were P2P health insurance for individual with the same health level as me. I'd be totally in. 1 would still have to pay the obamacare penalty, it seems.
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