james
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Post by james on Nov 2, 2015 9:12:28 GMT
I was going to create a thread like this one but found that someone has already done so. I am probably dumb but I am finding the way the SM is presented here confusing. I did view the videos and at that point I think that I have understood how it works but when I get to try it somehow I loose my grasp on what I am seeing. The problems are bid vs offer, and the Yield. How those the yield relate to the interest rate, the principal I buy and the rate I paid for it? I seem to remember something from when I was at school many years ago. Also what is the difference between AER and yield if any? I would be grateful for anyone who can explain this in very simple terms. XIRR is yield and pretty much the same as AER and is the important thing. If you want to know where the highest yields are to be found, check ALL of the loans available via the secondary market loan list screen. Don't use the markups shown on that screen, go and check each loan for the best available XIRR/yield/AER. It's entirely possible for the loan with higher markup to also have higher XIRR. All that is needed is for the higher markup loan to have a longer term remaining and the markup not to eat all of the extra return from the higher payment remaining count. Ignore the markup. Pick an XIRR/yield that you want. Ablrate know that the way the secondary market listing screen works now can cause people to buy based on lowest markup instead of highest yield and plan to change the screen, no ETA yet. The market actually works really well aside from some conveniences and relatively easy to fix matters like this. Really great potential long term for it.
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ablender
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Post by ablender on Nov 2, 2015 9:36:37 GMT
Thanks for the explanation. I will do some practice.
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Post by ablrateandy on Nov 2, 2015 9:49:30 GMT
I'm always available if you want to chat through, but my strategy (if I didn't helpfully provide liquidity all the time!) would be to focus on the AERs and stay as fully invested as possible. If something is at a 105 cash price people sometimes get put off but that is TOTALLY illogical. If the yield is still what you want then buy it. The cash price is an irrelevance in my opinion unless you are very worried about the likelihood of the capital being repaid, in which case you really shouldn't be lending on that loan anyway.
Also, there is no disadvantage from ALWAYS having your loan parts on sale as we still pay interest up to the point of sale, so if you buy something at 101p in the pound, feel free to put it back on sale at 102p in the pound.
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ablender
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Post by ablender on Nov 2, 2015 10:28:45 GMT
If I follow the example, buy at 101 and sell at 102, will it not reduce the AER which will make it less likely to sell? (Sorry if I am totally off with this - it is not my best area)
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Post by ablrateandy on Nov 2, 2015 10:47:15 GMT
Yes indeed. But as more lenders come onto the platform you will find that some of them are keen to diversify quickly and so will be willing to buy parts at a lower AER.
Example
So if 101.00 cash price = 10% AER and 102.00 cash price 9% AER.
You buy today at 101 and if you hold to maturity you will get a 10% AER. If you put it up for sale and it doesn't sell then you still get 10% AER. If you put it up and someone buys it off you at 102.00 then you get 102.00 to re-invest (ie. a 1% profit plus the interest that you have already earned). For that to work you need to just keep checking that there are other loans available for you to re-invest in at a higher AER than you are selling at. If, in this example, you couldn't re-invest higher than the 9% that someone bought from you at, you'd get a quick profit but no home for your money afterwards.
As we tend to target 9% - 13% as our rate for new loans, generally if you offer something with a 9% AER there will always be something in the pipeline that you can re-invest in if you sell.
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james
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Post by james on Nov 2, 2015 16:31:43 GMT
If something is at a 105 cash price people sometimes get put off but that is TOTALLY illogical. If the yield is still what you want then buy it. The cash price is an irrelevance in my opinion unless you are very worried about the likelihood of the capital being repaid, in which case you really shouldn't be lending on that loan anyway. Early repayment risk. Pay 105% then have the borrower repay the next day so you don't get the yield after all. No default, just something that tends to concern buyers who pay a premium. Many are used to consumer loans with no explicit costs for early settlement and quite significant early repayment risk.
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Post by ablrateandy on Nov 2, 2015 16:34:37 GMT
Ah good point. That is a legitimate risk (though borrowers with us have no automatic right to repay early and as I am very aware of what goes on in the secondary market I am unlikely to ever allow it to happen without speaking to the lenders involved and/or arranging a solution for them).
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james
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Post by james on Nov 2, 2015 19:52:51 GMT
Ah good point. That is a legitimate risk (though borrowers with us have no automatic right to repay early and as I am very aware of what goes on in the secondary market I am unlikely to ever allow it to happen without speaking to the lenders involved and/or arranging a solution for them). So what can you do to formalise this and hence increase the potential confidence in higher premium offers? Something as apparently straightforward as "We will ensure that anyone who buys at a premium of no more than 15% will not receive less in capital and after tax interest payments than they paid" will cut the capital loss risk but not fully recompense the buyer. Add "and will receive the XIRR they saw at purchase time for the time since purchase" would then protect their remaining economic interest. I picked 15% because that limits the potential cost to a borrower given possible sale volumes. Doesn't need to have a 15% cap it's just a first step to test whether people are willing to pay more even with protection. In essence the challenge is to get people to realise that these are more like corporate bonds that must be kept by the borrower until maturity than personal loans that can be repaid at a whim.
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Post by ablrateandy on Nov 2, 2015 20:13:01 GMT
Tbh I'd never really thought that people saw it as a genuine risk (probably because of my background!). However I'll think on it. Bonds normally have a spens clause in them and we could do something similar. It normally requires the borrower to pay a very aggressive level.
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james
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Post by james on Nov 2, 2015 21:58:34 GMT
For context I expect to see at least 30% full early settlement and many extra partial payments on consumer credit loans at platforms like Zopa that have provided the background for many of those using P2P today. Really significant to buy decisions and it leads to considerable reluctance to buy at more than single digit premiums.
I've sold hundreds of loan parts at Bondora but have only been able to sell at more than 5% infrequently. First batch are previously defaulted loan pieces where penalties being collected each month drive up the "interest" included in the XIRR and I sold at the maximum permitted premium level of 140% with these XIRRs: 97.94%, 97.44%, 96.78%, 96.78%, 95.53%, 88.22%. Below those were:
119% XIRR 25.81% The loan had previously defaulted, monthly penalty payment collection drove up the XIRR 114% XIRR 23.75% 114% XIRR 20.06% 109% XIRR 25.46% 109% XIRR 22.91% 109% XIRR 17.47% 108% XIRR 35.28% 108% XIRR 15.46% 107% XIRR 35.11%
And that's it, the rest have been at no more than 5% premium, a magic number because it is the previous premium cap level that had been in place for many years. I don't think the XIRRs below 20% are achievable in the current market there at those premiums, those are quite old sales. Higher than 5% premiums are probably achievable with enough work and I do intend to see some for loans with original interest rates at suitable levels, which used to be a near-standard of 28% regardless of loan quality.
Completely understandable that with your bond market background you wouldn't have seen this sort of thing as an issue.
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SteveT
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Post by SteveT on Nov 10, 2015 13:42:49 GMT
ablrateandy, a bit of feedback. I was struggling to understand why the "Waste to Energy Equipment" loan wasn't visible on the Secondary Market, when I could still link to its SM listing directly from my own holding. Finally it dawned on me that there is now a second page to the "Secondary Market" list of loans and this one is on page 2, along with a couple of others. I'm a regular visitor to the page and I'd never noticed that before, so my guess is that a fair few others may be missing it too (the tiny "2" that you have to click to reach it is near-invisible, being bizarrely conceived as mid-grey text on a fractionally lighter mid-grey background). Is there really any need to spread just 13 loans over 2 pages? It would be much simpler to have them all on 1 page. If there's no easy way of achieving this, how about making the "2" button MUCH easier to spot?
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Post by ablrateandy on Nov 10, 2015 13:44:14 GMT
Cool thanks! SteveT . I'll have a look at improving that....
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james
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Post by james on Nov 10, 2015 13:53:45 GMT
Agreed. In general Ablrate puts too little information per page on such pages, whether that one or account summary or list of bids or offers or whatever else. At another place I have it configured to put 100 entries per page, the maximum the place will permit, not my prefersed maximum.
Since this one is a list of secondary offers a sort that puts those with offers then those with no offers but only bids followed by those with neither might be appropriate. Perhaps also sorted by yield in high to low order.
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Investboy
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Trying to recover from P2P revolution
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Post by Investboy on Nov 12, 2015 11:00:03 GMT
ablrateandy, a bit of feedback. I was struggling to understand why the "Waste to Energy Equipment" loan wasn't visible on the Secondary Market, when I could still link to its SM listing directly from my own holding. Finally it dawned on me that there is now a second page to the "Secondary Market" list of loans and this one is on page 2, along with a couple of others. I'm a regular visitor to the page and I'd never noticed that before, so my guess is that a fair few others may be missing it too (the tiny "2" that you have to click to reach it is near-invisible, being bizarrely conceived as mid-grey text on a fractionally lighter mid-grey background). Is there really any need to spread just 13 loans over 2 pages? It would be much simpler to have them all on 1 page. If there's no easy way of achieving this, how about making the "2" button MUCH easier to spot? Great tip! Never noticed that. Went and invested a bit on those loans. Don't like the fact I have to pay 101 - 102% and lower my yield < 10%, but what can you do. That is the cost of diversification.
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Post by ablrateandy on Nov 12, 2015 11:21:21 GMT
We seem to be crossing a bit of a yield threshold - lots of buyers at 10% so to get things over that you need to keep a sharp eye out or leave bids up there. As I was saying on another thread, if you are in this for a few years buy the longest assets that you can get hold of and sit on them as it is just the volume of money coming onto platforms that is driving rates down.
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