|
Post by overlycautious on Nov 8, 2016 7:35:42 GMT
How are people viewing the risk of sub-prime and near-prime lending in the current economy? My thoughts below, I'm interested if it matches the views/predictions of others.
I've had a chunk invested in AE loans since I started on MT, as they were easy to pick up. The last few months I've seen defaults rising on other platforms, which was expected given the political changes. I also looked in more detail at AE's business model, specifically at the 5 Oct update.
To me, it sounds like an entirely legal pyramid scheme. The company has expanded fast and made lots of loans, which potentially is getting into bubble territory (think the sub-prime mortgage market in 2007). When customers default they can recover the asset via G*S tracking, but the state it's in is not guaranteed. And to keep to the MT loan terms, they swap the defaulted loan out of the asset pool and put in a newly leased one.
So... the buoyant used car market pricing relies on demand being present, and the security relies on the rate of new loans being greater than the rate of defaults.
It's the latter that concerns me. Once demand falters and/or the rate of defaults increases, very quickly AE is in a difficult position in respect of these loans.
Your thoughs?
|
|
archie
Posts: 1,838
Likes: 1,842
|
Post by archie on Nov 8, 2016 8:57:12 GMT
I have a large part of my MT portfolio in AE loans but I'm crazy
|
|
jcm9000
Member of DD Central
Posts: 179
Likes: 151
|
Post by jcm9000 on Nov 8, 2016 16:08:34 GMT
I do wonder about the amount of people that are going to get a massive shock when interest rates start to rise and they suddenly realise they cant afford their 4/5 bed house mortgage and their rangey evoque on two 30k salaries..... I have a fair bit in AE for now, but i'll be watching what happens when interest rates rise very closely.
|
|
Investboy
Member of DD Central
Trying to recover from P2P revolution
Posts: 564
Likes: 201
|
Post by Investboy on Nov 8, 2016 16:32:52 GMT
I do wonder about the majority of people that are going to get a massive shock when interest rates start to rise and they suddenly realise they could never afford their 1/2 bed London flat/house mortgage and their rangey evoque on two 50k salaries..... I have a fair bit in AE for now, but i'll be watching what happens when interest rates rise very closely. I allowed myself a little correction for my local market ;D
|
|
jcm9000
Member of DD Central
Posts: 179
Likes: 151
|
Post by jcm9000 on Nov 8, 2016 16:36:12 GMT
heh, yeah, I'm up in the outskirts of civilisation in Scotland. The big new town they built in Larbert is going to be a ghost town if rates go whoosh....or at least the beemers and rangeys will go to be replaced by skateboards...
|
|
james
Posts: 2,205
Likes: 955
|
Post by james on Nov 8, 2016 19:57:02 GMT
To me, it sounds like an entirely legal pyramid scheme. A pyramid scheme is one where people are paid for recruiting people to recruit other people and the product, if any, is incidental. There is no aspect of the AE loans that in any way pays people for recruiting people to recruit others. Your later description is closer to describing a ponzi scheme, where money from later investors is used to pay others, creating the illusion of profit. But you missed a key attribute of the deals. to keep to the MT loan terms, they swap the defaulted loan out of the asset pool and put in a newly leased one. ... So... the buoyant used car market pricing relies on demand being present, and the security relies on the rate of new loans being greater than the rate of defaults. ... It's the latter that concerns me. Once demand falters and/or the rate of defaults increases, very quickly AE is in a difficult position in respect of these loans. The most common AE loans don't quite work like that. instead: 1. the payments by their borrower for the car are the core revenue stream and the AE loans are mainly secured on that revenue stream. 2. the car loans are swapped with others if their borrower defaults, changing both the car and the revenue security to the new customer. 3. the cars and regular payments on them are security that matters only in the event that the lending business fails. Until then, it's the lending business operating profitably - or growing to future profit with funding for its growth - that matters. It's the ongoing payments that are the key to these loans, not the fallback car resale value. It's the loans that are generating the profit for the business and the business has to price those loans to cover any loss of value when it's customers default. The cars being sold do not have to be new and it's entirely possible that lower used car prices would help the business by making car acquisition cheaper. Since that happens at the start, before some depreciation, it's a bigger value factor for the business than the potential future resale value after additional depreciation has happened, which would have been covered by the loan payments they have received. There is over-trading risk if a business makes commitments to do deals that it can't finance. The nature of the business here is likely to be very resistant to the most basic form of that since it has to get the stock first then has a revenue stream. But there is the related risk that it might misjudge the default loss level, perhaps due to changing trading conditions that lead to a much higher default rate earlier in the term of the lending it's doing. This is one of the things I expect MoneyThing to be monitoring. It's not solely based on car prices but on the balance between charges to borrowers and loses on car sales for defaulted loans, with overhead and cost of sales and related things also part of the picture. Over-trading risk is very important because it's a major killer of young businesses. MoneyThing itself is subject to over-trading risk and should be very familiar with the range of competing pressures on capital involved.
|
|
littleoldlady
Member of DD Central
Running down all platforms due to age
Posts: 3,017
Likes: 1,835
|
Post by littleoldlady on Nov 11, 2016 22:03:00 GMT
IMO it is best to regard the loan as being to the company to provide working capital and dependent on the company's survival. I do not take much notice of the security, on this type of loan.
|
|
spyrogyra
Member of DD Central
Posts: 386
Likes: 148
|
Post by spyrogyra on Nov 12, 2016 11:16:52 GMT
I would imagine they take upfront deposits - a certain % of the value of the car.And usually they would price the car higher than what they have paid for. That amount would serve as a buffer if the car borrower defaults and the asset needs to be sold. In many cases, providing the asset is recovered in good condition,it could be leased again (so another deposit will be taken).
|
|
|
Post by bracknellboy on Nov 23, 2016 14:34:26 GMT
MoneyThing: Is this stream of AE loans essentially financing expanding business, or is there an element of it which is replacing existing sources of finance for AE ? I can't recall whether there are any financial details about the company posted against the loans, but recall there are not.
|
|
archie
Posts: 1,838
Likes: 1,842
|
Post by archie on Nov 23, 2016 15:52:51 GMT
MoneyThing : Is this stream of AE loans essentially financing expanding business, or is there an element of it which is replacing existing sources of finance for AE ? I can't recall whether there are any financial details about the company posted against the loans, but recall there are not. My understanding is it's expanding business which is why the loan amounts vary based on demand. Good to get clarification though.
|
|
|
Post by Deleted on Nov 23, 2016 16:25:10 GMT
I suspect the main borrowers are JAMS or just below JAMS, with a couple this can include people who are on minimum wage or with some sort of tax-support. The present rise in the minimum wage will help some of them and the changes in tax-credits will hurt others. Either way the need to get to work when work is hard to access without a car will continue for a fair few people who just cannot gather together enough to buy a car outright.
I suspect with Brexit hanging over the country (see large flaming sword in the sky) the chances of interest hikes is just about zero, though the chance of inflation cutting in will hurt disposable incomes and may inflame pay rates. Since the car is needed for the job, other things will have to be given up until either wage inflation allows for payments to continue or lack of access to markets ensure the employee's business goes bust, only time will tell.
Much as I like these loans, do look at the car site linked to the loan. My notes from reading about the company are probably a bit unfair but were "The cars are end of life, often 50k to 70k on the clock, just up to staying on the road safely for the daily commute often with 2 or 3 people in them". So at least they are doing their bit for car-pooling.
The whole growth of the UK looong distance commute is another matter and shows the difficulty of moving house/school to get to the available job. The right to buy makes this harder and guess what this government has just agreed to? You guessed it, more right to buy. Yep, with a country now addicted to commuting the country gets more commuting.
Will this government do much to help? No. Do the majority of home-owning voters want this to change? No. Will a drive to increase productivity make this worse? Yep.
Rant over
|
|
|
Post by SophieThing on Nov 23, 2016 21:00:18 GMT
MoneyThing : Is this stream of AE loans essentially financing expanding business, or is there an element of it which is replacing existing sources of finance for AE ? I can't recall whether there are any financial details about the company posted against the loans, but recall there are not. Hi Bracknellboy, Yes the loans are to fund their expansion and not to replace other finance. Kind regards Sophie
|
|
duck
Member of DD Central
Posts: 2,584
Likes: 5,726
|
Post by duck on Nov 24, 2016 8:28:45 GMT
My car has more than 170 k on the clock...praying it is not "end of life" but at least it is paid for. Seems a bit harsh to classify those cars as that unless they have been trashed by previous owners. I commute 2 to 4 hours daily, unable to move due to illegal residents nearby for the past 8 years. If I keep my "at risk job", it's unlikely to change. 80K on my white van, just broken in! Until I 'retired' last year I always commuted by motorcycle (up to 190 miles a day in all weathers!) 102K miles and it is still sweet. 1 valve shim changed and 2 swapped + routine maintenance. Look after a vehicle and it looks after you.
|
|
|
Post by chielamangus on Nov 24, 2016 21:29:54 GMT
I suspect the main borrowers are JAMS or just below JAMS, with a couple this can include people who are on minimum wage or with some sort of tax-support. The present rise in the minimum wage will help some of them and the changes in tax-credits will hurt others. Either way the need to get to work when work is hard to access without a car will continue for a fair few people who just cannot gather together enough to buy a car outright. I suspect with Brexit hanging over the country (see large flaming sword in the sky) the chances of interest hikes is just about zero, though the chance of inflation cutting in will hurt disposable incomes and may inflame pay rates. Since the car is needed for the job, other things will have to be given up until either wage inflation allows for payments to continue or lack of access to markets ensure the employee's business goes bust, only time will tell. Much as I like these loans, do look at the car site linked to the loan. My notes from reading about the company are probably a bit unfair but were "The cars are end of life, often 50k to 70k on the clock, just up to staying on the road safely for the daily commute often with 2 or 3 people in them". So at least they are doing their bit for car-pooling. The whole growth of the UK looong distance commute is another matter and shows the difficulty of moving house/school to get to the available job. The right to buy makes this harder and guess what this government has just agreed to? You guessed it, more right to buy. Yep, with a country now addicted to commuting the country gets more commuting. Will this government do much to help? No. Do the majority of home-owning voters want this to change? No. Will a drive to increase productivity make this worse? Yep. Rant over The usual @bobo pessimistic, negative and extreme view of the world. There's always a quick way out, you know!
|
|
hazellend
Member of DD Central
Posts: 2,361
Likes: 2,179
|
Post by hazellend on Nov 24, 2016 21:44:05 GMT
I'm a raging optimist myself!
|
|