How safe is peer-to-peer lending? 3


Harmoney RiskIn light of Diana Clement’s great article on the realities of peer-to-peer lending using the Harmoney platform, I’d like to mention a further concern of mine – the risk of borrower default.

Harmoney have a policy of offering borrowers the option of a top-up / re-write after only 3 months of regular payments towards their existing loan.  So, that’s a total of only 3 payments (one per month) to constitute a good and reliable payment history.

Is this a good idea?  Is this what a prudent lender would do?

Having worked in banking, I know that offering a top-up after only 3 payments is not something that a risk-averse lender would consider.  There are instances where circumstances have changed dramatically (e.g. gaining higher paid employment) and these would be looked at on a case-by-case basis.  The idea of sending out offer letters to borrowers after only 3 payments though – no way would that happen!

A lot of investor grumbling has been heard around Harmoney’s double-dipping on the fees of re-written loans, but a bigger concern really is the quality of these loans when they are re-written.  Have the borrower’s circumstances really improved that much that they can afford to repay a (sometimes much) bigger debt?

Whilst a good return on investment is important to an investor, the return of the investment is even more important.

On Harmoney’s website they have a wee graph that can be seen here.  If you scroll down to “Defaults over time” then you’ll see the graph showing that the highest risk of borrower default is between 4 and 10 months.

Why are Harmoney offering re-writes at 3 months when a far more prudent time to do this would be at 11 or 12 months?

Lending Club in the USA will allow additional lending after 12 months of on-time payments.  I believe Harmoney should be operating under the same model.

When I met with Harmoney’s Mark Bardi the answer to the question “why only 3 months?” was simply that the directors of Harmoney are from a consumer finance background and that 3 months was fairly common in the industry.  I’m not convinced, but then I’m a suspicious sceptic.  When it comes to financial matters, being sceptical can only be a good thing, right?

So, given that I don’t believe 3 months to be industry standard, is there another reason why Harmoney could be re-writing loans at 3 months?

Yes there is!

Unfortunately, Harmoney’s business model relies heavily on the fees generated by writing new loans (or re-writing old ones).  There is a very serious moral issue with this model.

Investors are unhappy about the double-dipping of service fees – and rightfully so, but the fee that the investor pays is miniscule in comparison to the fees paid by borrowers.

With Harmoney using investors’ money to generate fees from borrowers, this poses a potentially serious risk to investors.

When I last spoke to Harmoney, they denied relaxing lending criteria.  I am, here’s that word again… sceptical.  My preferred loans are debt consolidation or home improvement loans where the repayments are less than 10% of the borrower’s income.  These loans are harder to find now, compared to when I started investing over a year ago.

In my view, re-write churn has reduced the attractiveness of investing through the Harmoney platform.

The return to the investor is still better than the bank, but not as good as Harmoney used to advertise.  I see that with the dashboard update, the estimated gross annual return (weighted for default risk) has disappeared from view. Re-writes have made this extremely hard to estimate.

For me, it’s a matter of only investing the amount that I am prepared to lose.

I have yet to test out the competition, but it’s on the cards. Might be a little project for 2016?

[As always, please remember that I am not a financial advisor. I am writing about my own experiences and nobody is sponsoring me. I tell it as I see it, in the hope of educating and informing others]

 

 

 


Leave a comment

Your email address will not be published. Required fields are marked *

3 thoughts on “How safe is peer-to-peer lending?

  • Anon Bro

    Hi,
    I have been an active Harmoney investor.
    And I am debating whether to continue, Harmony’s has deceived it’s investors (Marketing Hype plus rewrites)
    Bear in mind when I was first investing in Harmoney, nobody suggested Harmoney would proactively go after re-writing their Borrowers at 3 months.
    Harmoney, to say it is about keeping the Borrower on the platform is nonsense.
    Don’t get me wrong I have made better gains than the bank because I have been careful (or lucky 1 defaulter so far), Mainly investing in E grade averaging upper C’s. But I also have the risk, so that needs to be part of the equation, and it is.(ON A 1/2 – FULL TERM LOANS).
    My comments below require a little understanding of the Harmoney model, and my examples below are based on a loan of $10,000 at 25%.
    Round numbers for easy of calculation.
    I hope my numbers are correct. ( I have used a monthly compounding model for calculating interest payments to equal a 20% annualised interest rate. e.g. 1.5309% per month interest in arrears, 36 x $384.61 repayments.
    In my personal situation the percentages are higher and hence the impact has been more obvious.
    If Harmoney had not played with re-writing at 3 months I would not have run the numbers so deeply.
    I should be returning 23% after fees, but due to re-writes I am lucky to be returning 18% (rewrites are 20% of Harmoney Loans to date).

    Investor fees are 1.25% of total principal (plus interest).

    1. Here is what a simple Mum and Dad investor sees.
    Getting 25% return and for that they pay fees of just over 1.25% of that. so just less than 23.75% return.
    wrong…

    2.
    We get 38.4% return over the total 36 months, before fees. this is about 36.7% over that total 36 months, which is probably about 10-11% per annum.
    This of course is based on a single loan, assumes you are not re-investing the returned principal and interest. If you do re-invest it back in then scenario 1 will be closer.
    When someone starts paying back a loan over a 36 term 47%+ of repayments are interest for the first 3 months. but the last 3 months are 4%->0%.
    So it evens out at $3840 of interest over 36 months
    You get 19.3% in first year, 12.8% for second year and 4.6% for the third year.
    This shows you the sliding scale of financing and hence the reason for wanting to re-write.
    Harmony’s enables you to re-invest and diversify (albeit difficult) model, so this stabilises your returns at the higher level.

    But here is the kicker (killer):

    So now consider you are seeing 40-50% Interest being returned into your account (first few months mine was more like 50%, “wow this is awesome”, knowing full well that it will come down over time to the 23% range (grade E’s).
    Then all of a sudden Harmoney decide to proactively market to borrowers and re-writing (20% of them)
    So all of a sudden your principal starts coming back in, but Harmony still takes 1.25% of that, obliterating 20% your returns. Yes your money has come back, but you invested it for a reason, and at high risk. Without knowing Harmoney would do this.

    Scenario:
    3.
    3 Months of payments and then a re-write (paid off in Month 4). That promoted 23.7% suddenly becomes 17.8%(annualised) after fees.
    But hang on, I spent time evaluating these loans and also was the one that took the risk. And Harmoney you promoted to me a 23.7% return after fees.

    4.
    Had the Borrower stuck to the loan like they probably would have for 12months and repaid on 13th month.
    The return would have looked more like 19.8%, that pill is easier to swallow, but not great.

    So Harmoney are still getting their 1.25% even though the money is at risk for about 4 months.
    Not only that they get it again on the next loan.
    Don’t forget to add the 2 x Borrower fees to this equation.

    5.
    If the loan is repaid first month in full. You take home 7% annualised.

    This bring me to my points:
    Harmoney you have/are misrepresenting your approach and the figures to the investors.
    You are taking the p1ss with 3 month re-writes.
    It is in your best interests to re-write, not the borrowers or the Investors best interests.
    So Harmoney if you are reading this, your proactive approach to marketing re-writes is underhanded, and feels negligent. You are taking from the investors when you rewrite potentially funds that appear to have been realised.
    Your listings do not show these numbers because it would look very bad. I have some loans where Harmoney takes 50-70% of the interest earned effectively. (70% was paid at 1.5 month mark)
    It is the investors money you are playing with here. You still get your money no matter what. So I suggest you give it a chance for this to be successful for all parties who are investing.
    I question whether all those borrowers required additional funds at 3 months, it is very easy to accept additional lending when it is handed to you, most borrowers would not even think about additional funds unless hardship struck them.

    Lastly, as an investor I would rather see reduced Borrower Fees reduced %, and better transparancy, this would create more investment opportunity. (to date loans do not come quick enough)

    • Meg Post author

      Hi there Anon Bro,

      Wow! I appreciate the immense amount of effort you have put into your comment and can see that you feel as passionately about these Harmoney changes as I do.
      I’d like to use your comment as the basis for a post, so I hope that’s okay. I’ll make sure that everyone knows that it’s your work, not my own.
      In the past 2 days Harmoney have rewritten 3 of my loans. The number of notes that I hold is diminishing all the time as I’m withdrawing the funds at this stage, rather than reinvesting.
      Once again thank you for your most excellent comment! 🙂
      Cheers,
      Meg