paulgul
Member of DD Central
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Post by paulgul on Nov 27, 2015 15:35:11 GMT
Anybody fancy an eternity ring loan? Effective rate -30.94%
Such a bargain and its still there, Black friday as well 
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Post by mrclondon on Nov 27, 2015 17:00:19 GMT
An answer to that question has been touched on earlier in the thread - the issue is most people would consider p2p loans to be defined as "simple debts" not "securities". For most people without formal accountancy qualifications, entering exactly what is provided by platforms on tax statements into the self assessement system is the only sensible strategy to avoid a messy outcome if a HMRC investigation was launched into their return for any reason.
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webwiz
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Post by webwiz on Nov 27, 2015 18:12:03 GMT
Nothing on at 10% (pre tax!) or above return currently. The addition of a yield column is a definite improvement. IMO the addition of the yield column just makes the SM a laughing stock. What is the point of having lots of loans on offer that would result in a guaranteed loss for any innocent purchaser?
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Post by Financial Thing on Nov 28, 2015 4:37:27 GMT
Removing the premiums and keeping the discounts will make the SM liquid rather than a place for loan flippers to profit. fundingsecure take a page out of SS's and AC's secondary market playbook as they have done it right. |
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bob76
Posts: 103 
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Post by bob76 on Nov 28, 2015 20:30:00 GMT
I think people are also getting greedy!
I am happy to buy something at 8% or 9% interest, for the sake of diversification. This still beats regular savings account. I wouldn't commit to such rate over 3 or 4 years (if base interest rates are rising) but for a 6 month loan, it's fine. People don't seem to understand that it's hard to have true diversification and earn 12% interest at the same time.
Therefore, buying at a premium is acceptable, as long as the actual rate of interest is indicated at the time of purchase (and it is).
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Post by mrclondon on Nov 28, 2015 20:52:10 GMT
I think people are also getting greedy! I am happy to buy something at 8% or 9% interest, for the sake of diversification. This still beats regular savings account. I wouldn't commit to such rate over 3 or 4 years (if base interest rates are rising) but for a 6 month loan, it's fine. People don't seem to understand that it's hard to have true diversification and earn 12% interest at the same time. Therefore, buying at a premium is acceptable, as long as the actual rate of interest is indicated at the time of purchase (and it is). Depends on each lenders personal assessement of the likely long term default rates and tax rates. Based on my analysis of theoretical losses on FS since launch (i.e. removing the effect of FS dipping into their own pockets to cover some losses) I'm expecting capital losses to reduce the effective yield of FS loans by 6%. So using my expected loss rate, lending at 8% on the SM would give a potential effective yield after capital losses of 2% less 45% tax is a net yield of 1.1% pa. (or negative yield under current tax rules of no allowance against income for capital losses). Is that really worthwhile for the effort involved ? Current market interest rates are largely irrelevant, the capital loss rate is the critical factor. And I find it hard to believe the loss rate on pawn loans won't accelerate as the economic cycle progresses. Remember interest received today is compensation for future capital losses.
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duck
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Post by duck on Nov 29, 2015 8:23:13 GMT
I think people are also getting greedy! I am happy to buy something at 8% or 9% interest, for the sake of diversification. This still beats regular savings account. I wouldn't commit to such rate over 3 or 4 years (if base interest rates are rising) but for a 6 month loan, it's fine. People don't seem to understand that it's hard to have true diversification and earn 12% interest at the same time. Therefore, buying at a premium is acceptable, as long as the actual rate of interest is indicated at the time of purchase (and it is). Depends on each lenders personal assessement of the likely long term default rates and tax rates. ...... Wise words mrclondon .
I invest in various platforms in a personal capacity, for my business and on behalf my partner (non tax payer). I have spreadsheets for each platform and have an entry for 'anticipated capital loss' and 'tax liability'. The capital loss varies between platforms and is reviewed on a regular basis. Due to the different way losses are allowable/not allowable for business/personal loans what may be attractive for the business might not be for me as an individual. Taxation makes a big difference with loans made by my partner/myself, again what might be attractive to my partner might not be to me.
Which is why I'm content with an aftermarket that is clear in what is on offer. If an offer fits buy it, if not don't.
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bob76
Posts: 103
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Post by bob76 on Nov 29, 2015 10:39:27 GMT
Based on my analysis of theoretical losses on FS since launch (i.e. removing the effect of FS dipping into their own pockets to cover some losses) I'm expecting capital losses to reduce the effective yield of FS loans by 6%. 6% loss! That sounds quite high, particularly for asset-backed loans. So you are only expecting 6% net return from FS (before tax). If so, why do you invest in FS at all? AC or asset protected loans on FC could be a safer bet.
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Post by mrclondon on Nov 29, 2015 13:09:58 GMT
Based on my analysis of theoretical losses on FS since launch (i.e. removing the effect of FS dipping into their own pockets to cover some losses) I'm expecting capital losses to reduce the effective yield of FS loans by 6%. 6% loss! That sounds quite high, particularly for asset-backed loans. So you are only expecting 6% net return from FS (before tax). If so, why do you invest in FS at all? AC or asset protected loans on FC could be a safer bet. The 7% yield of the two packaged accounts at AC and the notional running yield of the income TLC's at TC will not be a random number. It represents the most likely long term yield from this asset class based on the limited data available at this relatively early stage in the life of the p2p sector. On the basis of theoretical losses at FS since launch I feel that FS will long term yield less than 7%. By way of comparison my XIRR (AER equivalent) at FC is running at 6.4% based on a loan book with c. 700 loans built from 2010 to 2013. I'm seeing no statistically significant difference between recovery rates on all asset security (i.e. fixed & floating debenture) and unsecured loans - which suggests at the point of failure, SME net assets are essentially zero. Performance of my AC loan book is very difficult to judge, as whilst many of the defaulted loans should return most of the capital very few are likely to return the interest that is being accrued whilst defaulted (a situation that can easily last a couple of years). Returning to FS, we have not as yet had any property backed loan defaults where the recovery period is very likely to be 1 to 2 years. I have only had one loan with capital writen off on FS (30% loss on Lubins art) but that one loan has has reduced my XIRR by 1.2%. FS have covered losses over and above 30% on these Lubin loans (I suspect 50%+ loss is probably nearer the mark). They covered the 69% loss on the aboriginal art, the near total loss on the Michael Jackson memorabilia multiple loans, and have added sums to the recovery proceeds on a number of other loans. In determining an acceptable yield, consideration should also be given to platform risk. A set of default stats that disguise the true performance of the loan book, and a secondary market allowing negative yield must increase the risk of regulatory action. However I am perfectly happy that others believe the FS loss rate will be significantly less than I'm expecting as it will enable me to sell my FS loans on the SM as they approach 5 months old. This will improve my expected yield considerably as I won't suffer any capital losses. Brill.
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bob76
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Post by bob76 on Nov 29, 2015 13:20:27 GMT
OK, but there is a significant difference between losing capital and losing interest for 1 or 2 years, while assets are being recovered.
If I invest £100 @ 12%, losing the capital is £100, not earning the interest for 1 year @ average of 7% is a "loss" of £7...
Therefore, asset-backed loans should still be much better than standard loans, in term to getting back most of the capital in case of default, particularly for low LTV loans (unless valuation is done very badly, in which case FS will have some responsibility of misleading investors).
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mikes1531
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Post by mikes1531 on Nov 29, 2015 16:34:22 GMT
I am happy to buy something at 8% or 9% interest, for the sake of diversification. This still beats regular savings account. I wouldn't commit to such rate over 3 or 4 years (if base interest rates are rising) but for a 6 month loan, it's fine. People don't seem to understand that it's hard to have true diversification and earn 12% interest at the same time. Therefore, buying at a premium is acceptable, as long as the actual rate of interest is indicated at the time of purchase (and it is). Depends on each lenders personal assessement of the likely long term default rates and tax rates. Based on my analysis of theoretical losses on FS since launch (i.e. removing the effect of FS dipping into their own pockets to cover some losses) I'm expecting capital losses to reduce the effective yield of FS loans by 6%. So using my expected loss rate, lending at 8% on the SM would give a potential effective yield after capital losses of 2% less 45% tax is a net yield of 1.1% pa. (or negative yield under current tax rules of no allowance against income for capital losses). Is that really worthwhile for the effort involved ? : Accepting earning 8-9% for the sake of diversification is fine as long you actually earn 8-9%. The problem I have with the returns shown on the FS secondary market listings is that they are before-tax numbers, and the way FS described the tax situation for those parts appears to mean that what a taxpayer would net from a 8-9% part bought via the FS SM would be very much lower than what they would net from a 8-9% return on a 'conventional' investment. Consider this example... £100 part of 6-month 12% loan with four months remaining being sold at a 1% premium. Since the loan pays 1%/month, the buyer will pay £103 for the part (including £2 for interest already accrued and the £1 premium). At maturity, they will receive £106 for a net profit of £3. £3 earned over four months on a £103 investment is a return of 8.74% p.a., and that's about what would be shown on the SM listing. (I say "about" because so far I've been unable to match FS's numbers exactly.) When it comes time to pay tax, however, they have to pay tax on the whole £6 of interest received. For a basic-rate taxpayer, they'd owe £1.20, leaving them with £1.80 in hand. £1.80 earned over four months on a £103 investment is a return of 5.24% p.a., so 40% of their return has disappeared in tax. A higher-rate taxpayer would owe £2.40 of tax, leaving them with 60p in hand. 60p earned over four months on a £103 investment is a return of 1.75% p.a., so 80% of their return has disappeared in tax. The requirement to pay tax on the interest accrued during the first two months of the loan effectively doubles the investor's tax rate. If the loan part has only three months left to run, the results are much worse. They buyer pays £104 and receives £106 at maturity. £2 earned over four months on a £104 investment is a return of 7.69% p.a. The amounts of tax to pay are unchanged, £1.20 at the basic rate and £2.40 at the higher rate. This leaves the basic-rate taxpayer with a profit of 80p -- an after-tax return of 3.08% -- and the higher-rate taxpayer with a loss of 40p. If I've understood this situation correctly and all investors were similarly aware, the taxpayers would be selling their parts before maturity, the non-taxpayers would buy those parts -- and HMRC would receive no tax payments at all! And I can't imagine that HMG would accept that situation for long. mrclondon: I haven't tried to do any calculations, but does the fact that parts available on the SM have a shortened life mean the impact of bad debt is greater on SM parts than on parts held for the entire term? My initial reaction is that since earnings are reduced because of the shorter holding time there'd be less income to offset the bad debt losses and the impact of those losses would be amplified. But perhaps that's built into the top line shrinkage from 12-13% to 8% in your example.
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arbster
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Post by arbster on Nov 29, 2015 16:39:30 GMT
OK, but there is a significant difference between losing capital and losing interest for 1 or 2 years, while assets are being recovered. If I invest £100 @ 12%, losing the capital is £100, not earning the interest for 1 year @ average of 7% is a "loss" of £7... Therefore, asset-backed loans should still be much better than standard loans, in term to getting back most of the capital in case of default, particularly for low LTV loans (unless valuation is done very badly, in which case FS will have some responsibility of misleading investors). I think mrclondon cited a number of examples where, left to their own devices, lenders would have lost (significantly more of) their capital, even on asset-backed loans. It's inconceivable that credit professionals would recommend unsecured lending to SMEs at 6-9% if they believed it to be a greater or even comparable risk than an asset-backed loan at 12%. Presumably, the reason an asset is required is that the individual in question is not deemed sufficiently credit-worthy to raise credit (at an acceptable rate) without it - the rate of interest is indicative of the associated risk of default, delays to disposal of the asset, etc. In the rare cases that a solid exit plan is identified (eg a guaranteed buyer for the asset) the rate typically goes down to c. 8%.
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arbster
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Post by arbster on Nov 29, 2015 16:42:15 GMT
If I've understood this situation correctly and all investors were similarly aware, the taxpayers would be selling their parts before maturity, the non-taxpayers would buy those parts -- and HMRC would receive no tax payments at all! And I can't imagine that HMG would accept that situation for long. My next venture will be a website hooking non-taxpayers up with higher-rate taxpayers to arrange the transfer of "toxic", tax-laden loan parts prior to term, for an appropriate consideration...
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Post by mrclondon on Nov 29, 2015 17:28:20 GMT
mrclondon : I haven't tried to do any calculations, but does the fact that parts available on the SM have a shortened life mean the impact of bad debt is greater on SM parts than on parts held for the entire term? My initial reaction is that since earnings are reduced because of the shorter holding time there'd be less income to offset the bad debt losses and the impact of those losses would be amplified. But perhaps that's built into the top line shrinkage from 12-13% to 8% in your example. A very good question, and one that has taken my brain a while to resolve. Yes there is a reduction of earnings to put towards losses, but perhaps not that large a reduction in £.pp as the buyer of SM part is paying for the accrued interest at par irrespective of any premium charged on the capital. So a buyer of a 5 month old loan is only forgoing a proportion of the final months interest if they pay a premium (as quantified by the effective rate at the time of purchase) , plus as you rightly remind us, the tax liability on the purchased accrued interest (which for non tax payers is of course zero).
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duck
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Post by duck on Nov 29, 2015 19:10:58 GMT
OK I'm willing to be shot down in flames so here goes
If you purchase on the FS secondary market your account statement shows something like Purchased £200.00 of investment in loan xxxxxx 29/11/2015 207.41 0 ......
Now I know that 7.41 is accrued interest (no premium paid) and this is confirmed on the screen when the purchase is made. This screen can be screen dumped as confirmation of accrued interest (it is shown as accrued interest and the totals show you have paid it on top of the loan purchase price).
What is there to stop me using this information (and having it available for HMRC enquiries) to deduct the accrued interest from the final 'interest paid' at term end (if I was to hold the investment to term)
I'm assuming here that the only 'evidence' I would present to HMRC would be my spreadsheets and screen dumps (as I have previously with a couple of platforms) thereby taking out of the equation the FS view of interest paid and any 'official' tax certificate that may be available.
I can think of a couple of possible reasons, but is this approach fatally flawed?
Thoughts appreciated.
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