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| Evaluating Financial Risk |
Provision Funds
Platforms such as Ratesetter and Zopa include a provision
fund to cover any expected defaults.
This is one reason why the rates of interest offered are relatively
low. The best interest on offer is
between5% and 6% with Ratesetter if you are prepared to lend your money for 5
years.
This post will focus on platforms with no provision fund
where defaults may directly affect the returns available to the lender.
Unsecured Loans
Funding Circle (FC) provide an estimate of the percentage
loans expected to default, based on historical data for each class of
loan. However, their loans are typically
for small businesses and the failure rate, in my experience, may be higher than
the FC prediction and recovery rates are relatively small because the majority
of their loans are unsecured (ie not underwritten by a tangible asset such as
property or land).
Secured Loans at 12%
I now avoid unsecured loans and prefer platforms such as
Saving Stream and Money Thing. Saving
Stream loans are almost exclusively secured against property and land while
Money Thing has a broader mix of assets that also include artworks and
portfolios of goods such as electronics or jewellery. Surprisingly these sites both offer annual interest of around 12% with no fees charged to the lender.
Minimising Losses
My tip to minimise losses is to spread your money across as
many loans as possible. Another tip is
to further diversify by lending through several PtPL platforms. You should also assess the risk associated
with individual loans. For example, if
property is to be developed, is the business case for the loan realistic based
on current market conditions?
Accuracy of Valuation
Something important to consider is the accuracy of the
valuation of the asset. Platforms
usually quote the Loan To Value (of the asset), abbreviated to LTV, as a
percentage. So, for example, a loan for £100,000
secured by an asset worth £200,000 would have an LTV of 50%. The lower the LTV the less likely you are to
lose money due to a default coupled with a poor valuation.
Beware works of art where the estimated value may be
optimistic depending on the state of the market and current fashions. In the case of a default, the actual value of
the asset must cover money owed to the platform, the lenders capital and
interest as well as selling costs, legal fees, transport costs etc.
Evaluating PtPL Platforms
In my next post I’ll explore how we can evaluate the risk in individual PtPL platforms and identify how likely they are to have loans that default where the capital or interest owed are not fully recovered.
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