markr
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Post by markr on Jul 16, 2016 21:31:31 GMT
As part of the "Ratesetter in the news" thread, a discussion about the change to the provision fund came up. Something someone (propman) said
"The credit fees are lent to the borrowers"
got me thinking. Let me work through how I think it works, then please tell me if I'm talking rubbish.
OK, ignoring all other fees and taking example numbers for simplicity...
In the Old Method, a borrower wants to borrow £10000, RS takes £11000 of lender money, puts £1000 into the PF and gives the rest to the borrower. All being well, the borrower pays capital and interest as if they have a loan of £11000, and at the end of it the lenders have their money back, plus interest, and the PF has the £1000. If the borrower defaulted without making a payment, the PF would repay the lenders their £11000, and so end up £10000 lighter (ignoring interest).
In the New Method, a borrower wants to borrow £10000, RS takes £10000 of lender money and gives it to the borrower, putting nothing into the PF. All being well, the borrower pays capital and interest as if they have a loan of £11000, and at the end of it the lenders have their money back, plus interest, and the PF has £1000, plus interest. If the borrower defaulted without making a payment, the PF would repay the lenders their £10000, and so end up £10000 lighter (ignoring interest).
Is this a reasonable (much simplified) view of the two scenarios?
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Post by westonkevRS on Jul 17, 2016 16:50:40 GMT
As part of the "Ratesetter in the news" thread, a discussion about the change to the provision fund came up. Something someone (propman) said "The credit fees are lent to the borrowers" got me thinking. Let me work through how I think it works, then please tell me if I'm talking rubbish. OK, ignoring all other fees and taking example numbers for simplicity... In the Old Method, a borrower wants to borrow £10000, RS takes £11000 of lender money, puts £1000 into the PF and gives the rest to the borrower. All being well, the borrower pays capital and interest as if they have a loan of £11000, and at the end of it the lenders have their money back, plus interest, and the PF has the £1000. If the borrower defaulted without making a payment, the PF would repay the lenders their £11000, and so end up £10000 lighter (ignoring interest). In the New Method, a borrower wants to borrow £10000, RS takes £10000 of lender money and gives it to the borrower, putting nothing into the PF. All being well, the borrower pays capital and interest as if they have a loan of £11000, and at the end of it the lenders have their money back, plus interest, and the PF has £1000, plus interest. If the borrower defaulted without making a payment, the PF would repay the lenders their £10000, and so end up £10000 lighter (ignoring interest). Is this a reasonable (much simplified) view of the two scenarios? The "old method" description was perfect. The 'new method" was close, except the borrower would pay back a loan of £10,000 (there is no longer an £11,000). The APR which includes fees and interest, now has an extra interest element that we call "credit rate" which comes back as part of each monthly payment. But the APR is the same because there is no upfront fee. It's been transferred to the interest element of the APR equation. The loan looks more attractive to the borrower (and probably the regulator) because the initial loan amount is £10,000 and its cheaper to redeem early. It's bad for the Provision Fund because it has to wait up to 5-years to get the money. And some won't happen because of early redemption. It'll make no net difference on the defaults. But it does make the loans more competitive in the market place, is more comparable to a bank product thus attracting prime borrowers, is "fairer", and importantly creates a monthly Provision Fund contribution that won't stop if RateSetter doesn't lend as much for a while . Of course most loans are a mixture of new and old, its a case of blending the mix. And eventually moving all to lifetime, or at least that would happen if I was in charge..  Kevin.
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markr
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Post by markr on Jul 18, 2016 21:55:06 GMT
I'm getting there, I think, but still missing something.
In both cases, the borrower pays the interest, plus a little bit more. In the old way, the bit more is to pay the lenders who've topped up the provision fund, in the new way it's to contribute directly to the fund over time. So the difference in terms of repayments is that the borrower doesn't borrow the PF contribution, and so pays no interest on it.
I think I'm happy that the idea that the new method somehow lets defaulters off the hook is false - net loss to the PF of a default is the same, and the amount that the defaulter absconds with is the same. It rewards early payment, which I suppose is bad for the lender, but only fair.
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Post by propman on Jul 21, 2016 12:50:17 GMT
Anticipated claims have just shot up from £13m to £17m. Is there any specific reason for this, or is this a general reassessment of the prudence of the estimate in light of the forthcoming recognition of future payments to the Fund under existing agreements?
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Liz
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Post by Liz on Jul 21, 2016 15:06:38 GMT
Anticipated claims have just shot up from £13m to £17m. Is there any specific reason for this, or is this a general reassessment of the prudence of the estimate in light of the forthcoming recognition of future payments to the Fund under existing agreements? ISTM, that this is their new system. There is also a field for "Contractual Future Income", which i've not seen before. This all boosts coverage ratio to 1.27%; Which is a figure to watch. Looking at the 1 & 2 month late loans, is the £8.3m figure typical? Or part of the change?
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Post by westonkevRS on Jul 21, 2016 15:28:51 GMT
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