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Post by smrutib on Nov 19, 2015 16:50:12 GMT
Hi I am new to P2P. I have dipped my toes in the 'safer' offerings (RS, W) and am looking at the more risky ones now. I had a question about FS. On their website they say that the representative APR for borrowers is about 45%. However, the rates offered to lenders is 9%-13%. What explains such a big spread, especially since lenders are taking the default risk. Am I missing something here?
Thanks
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ramblin rose
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“Some people grumble that roses have thorns; I am grateful that thorns have roses.” — Alphonse Karr
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Post by ramblin rose on Nov 19, 2015 17:42:46 GMT
Hi I am new to P2P. I have dipped my toes in the 'safer' offerings (RS, W) and am looking at the more risky ones now. I had a question about FS. On their website they say that the representative APR for borrowers is about 45%. However, the rates offered to lenders is 9%-13%. What explains such a big spread, especially since lenders are taking the default risk. Am I missing something here? Thanks Hi smrutib, possibly - they're putting a fair amount of work into bringing you the opportunities to make a good return. Take a loan for £5000, that would mean them taking in £1125 and paying out £300 in interest at the typical rate of 12%, leaving £825. Out of this they have to deal with: (just a few things off the top of my head) handling the items, storing the items, getting valuations on the items, a proportion of the costs of providing the platform, bank fees to handle your deposits, bank fees to handle your withdrawal, discussion with borrowers to find out whether renewing, repaying or not redeeming, business overheads of varying types (office, computers, rates, salaries etc). If not redeemed, they have to find a buyer, perhaps arrange an auction sale. Those won't be the spreads on the larger property loans. If what they're offering is better than you can get elsewhere, it's a good deal. If not, it isn't. It's not really fruitful to worry about how much the person offering you the opportunity is making. It's what you make that matters (bearing in mind, as you rightly point out, that there will be some losses to take into account over time due to risk being held by the lender).
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ablender
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Post by ablender on Nov 19, 2015 23:10:58 GMT
RR: interesting and informative points you make. Cheers.
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Post by smrutib on Nov 20, 2015 8:51:12 GMT
RR thanks for your response. I probably didn't phrase my question properly. I don't mind FS making a profit. Obviously a profitable platform is a stable platform and that's good for us all. However, to gauge whether 9-13% is fair for the lenders then its also necessary to figure out what risk they are taking in the process. If a borrower is paying 45% then (at first glance) it would seem that there is very high default risk, which in turn would mean that lenders on this platform will not be making 9-13% but something much less. That's what concerns me. But if you are right and the high borrowing costs are driven by the costs of servicing loans like these, then of course risk to lenders is less. I will probably try to get in touch with FS and try to find out. Though I am new to P2P, I do finance for a living. And if there is one thing that's true in finance, its that actual returns (not projected or estimated) is driven primarily by the risk you are taking. That's why I am a bit  on this point  |
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Post by xyon100 on Nov 20, 2015 8:58:16 GMT
You can find the actual capital losses on the site. I was surprised to find so much given how careful they are supposed to be in covering the loans with assets.
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ramblin rose
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“Some people grumble that roses have thorns; I am grateful that thorns have roses.” — Alphonse Karr
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Post by ramblin rose on Nov 20, 2015 11:35:38 GMT
RR thanks for your response. I probably didn't phrase my question properly. I don't mind FS making a profit. Obviously a profitable platform is a stable platform and that's good for us all. However, to gauge whether 9-13% is fair for the lenders then its also necessary to figure out what risk they are taking in the process. If a borrower is paying 45% then (at first glance) it would seem that there is very high default risk, which in turn would mean that lenders on this platform will not be making 9-13% but something much less. That's what concerns me. But if you are right and the high borrowing costs are driven by the costs of servicing loans like these, then of course risk to lenders is less. I will probably try to get in touch with FS and try to find out. Though I am new to P2P, I do finance for a living. And if there is one thing that's true in finance, its that actual returns (not projected or estimated) is driven primarily by the risk you are taking. That's why I am a bit on this point It's a great idea to chat to the guys at FS about it - they are approachable and helpful in my experience. It's very refreshing to find a new lender who is properly mindful of the risks and who has bothered to read around the website first - if you stick around on the forum for long you'll find a surprising number who don't, and just blindly shove their money in. I've spent a life managing risk in one way or another, so I understand where you're coming from You are new to the forum, so won't be aware, I don't personally lend on anything lower than 13% at FS (used to be all the loans in the early days, but now very few) because of the fact that there are losses to account for which reduce the headline rate of return overall - it's what meets my personally acceptable returns need to be to make it worth my while lending here. (I inhabit the riskier end of the financial world in general  )
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Post by mrclondon on Nov 20, 2015 12:21:24 GMT
You can find the actual capital losses on the site. I was surprised to find so much given how careful they are supposed to be in covering the loans with assets. The stats page www.fundingsecure.com/investors/statistics shows capital losses of £15,612 (just over 0.2% of the c. £7m loans that have reached maturity) which has reduced the average yield of the loanbook from 12.5% to 11.9% a drop of just 0.6%. Most of this loss figure relates to 2 loans to 1 borrower against what turned out to be a poor valuation of the assets (Lubin paintings) That is a miniscule loss rate, and is in grave danger of providing a false level of comfort to prospective lenders. For the benefit of relative newcomers to the platform, FS in the early days (and even very recently with the caravan default) have topped up the external recovery proceeds with their own funds to reduce the capital losses experienced by lenders, and thereby skewing the published loss figure. The National Associateion of Pawnbrokers publishes stats which show 15% (by number) of pawn loans go unredeemed. With FS's diversiication into property bridging loans you'd expect the non-redemption rate to be lower, perhaps 10% would be a reasonable benchmark.
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Post by xyon100 on Nov 20, 2015 14:08:00 GMT
That's very interesting to us newbies. Thank you.
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mikes1531
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Post by mikes1531 on Nov 20, 2015 14:14:40 GMT
If a borrower is paying 45% then (at first glance) it would seem that there is very high default risk, which in turn would mean that lenders on this platform will not be making 9-13% but something much less. That's what concerns me. But if you are right and the high borrowing costs are driven by the costs of servicing loans like these, then of course risk to lenders is less. : I'm afraid I do not follow the above 'logic'. If the fact that the borrower is paying 45% interest leads to a conclusion that there's a high default risk, what difference does it make whether that high interest rate is the result of platform costs or platform spread? My own feeling is that if someone is willing to pay 45% interest then they must be in a rather awkward financial position with maxed-out credit cards and overdrafts. (If they did have access to credit from those sources, they'd probably be better off using those because of the lower interest rates.) This does suggest a high default rate. If the NAP stats mentioned by mrclondon are applicable to FS's non-property loans, then if the average loss for the 15% of loans that default is, say, 20%, then with 85% of a portfolio of 6-month loans earning 13% p.a. and 15% losing 20% (not p.a.), the return ion the whole portfolio would be 2.5% (0.85x0.13/2 - 0.15x0.2 = 0.025). Since that's over six months, the AER would be about 5%. That's a rather sobering thought!
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Post by smrutib on Nov 20, 2015 21:48:14 GMT
ramblin rose and mrclondon, thanks for your insights. Much appreciated.
mikes1531 - what I was trying to say is that the APR charged to borrowers reflects both credit risk as well as loan servicing costs. For unsecured loans, loan servicing costs are probably quite low. But for FS, they get such a wide variety of items that the valuation costs, storage costs etc. must be reasonably high and that's probably reflected in the borrower APR as well. Having said that, I am in complete agreement with you that these are high risk borrowers. The numbers that mrclondon quotes (15% non-redemption) kind of bears it out.
However, another interesting point from the pawnbrokers website (http://www.thenpa.com/press-and-media/keyfacts.asp)
The APRs that they charge range from 80 - 130%. So either FS gets better quality borrowers (in which case the non-redemption will be less than 15%) or they are charging much less to grow business. I hope it's the former.
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arbster
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Post by arbster on Nov 21, 2015 6:11:46 GMT
The APRs that they charge range from 80 - 130%. So either FS gets better quality borrowers (in which case the non-redemption will be less than 15%) or they are charging much less to grow business. I hope it's the former. So long as FS get the LTV "right", and are swift and effective in realising the value of the asset where necessary, then I'm not overly worried about non-redemption.
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Post by xyon100 on Nov 21, 2015 8:14:39 GMT
The APRs that they charge range from 80 - 130%. So either FS gets better quality borrowers (in which case the non-redemption will be less than 15%) or they are charging much less to grow business. I hope it's the former. So long as FS get the LTV "right", and are swift and effective in realising the value of the asset where necessary, then I'm not overly worried about non-redemption. I'm thinking along the same lines. I'm not too worried about delays or having my money tied up for a while, it's about getting that asset sold for value that was placed on it. Heck, I even bought a defaulted loan on SS, completely confident in their ability to sell it for the stated price and in good time. Which they did. :-)
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nick
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Post by nick on Nov 25, 2015 20:04:10 GMT
So long as FS get the LTV "right", and are swift and effective in realising the value of the asset where necessary, then I'm not overly worried about non-redemption. I'm thinking along the same lines. I'm not too worried about delays or having my money tied up for a while, it's about getting that asset sold for value that was placed on it. Heck, I even bought a defaulted loan on SS, completely confident in their ability to sell it for the stated price and in good time. Which they did. :-)
I agree, the LTV is critical in the pawn industry given there is reasonable expectation of non-redemption. In this respect, the valuations quoted for some recent loans where the items are more easily valued (eg cars - range rover etc), looked a bit rich. This made be slightly more weary, particularly for items are less readily marketable and whose valuations are inherently more subjective.
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on this point 
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